TAM/BAS BRIEF FOR CROATIA 2009-2011

April 2008

This document provides recommendations for TAM/BAS intervention in Croatia over the period 2009-2011. It is a product of the staff of the European Bank for Reconstruction and Development undertaken by the TAM/BAS Programme team and the Office of the Chief Economist. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Board of Directors of the EBRD or the governments they represent. The EBRD does not guarantee the accuracy of the data included in this work. This Report has been prepared by a core team led by Francesca Pissarrides (Office of the Chief Economist) and Valeria Della Rosa (TAM/BAS Programme). The team was assisted by Shahrooz Badkoubei, Birgit Goetz, Renata Deiuri, Ana Betica. The team also acknowledges the support from: HAMAG – Croatian Agency for SMEs; BICRO – Business Innovation Centre of Croatia; Croatian Chamber of Economy; HUP – Croatian Employers’ Association; Croatian Chamber of Trades and Crafts; Zagreb School of Management; National Competitiveness Council; APIU – Trade and Investment Promotion Agency; HPB – Hrvatska Poštanska Banka; CEPOR – SMEs and Entrepreneurship Policy Centre; HBOR – Croatian Bank of Reconstruction and Development; Ministry of Economy, Labour and Entrepreneurship; IMO – Institute for International Relations; Delegation of the European Commission to the Republic of Croatia; USAID / DAI; Erste Bank.

TABLE OF CONTENTS

1. Abbreviations .................................................................................................................. 3 2. Executive Summary........................................................................................................ 4 3. Previous TAM/BAS experience in Croatia................................................................... 8

3.1. TurnAround Management (TAM) Programme .............................................8 3.2. Business Advisory Services (BAS) Programme..........................................10

3.2.1. BAS Projects........................................................................................11 3.2.2. Market development activities.............................................................18

3.3. Linkages with banking.................................................................................20 3.3.1. TAM cooperation with EBRD Banking teams ....................................20 3.3.2. BAS cooperation with EBRD Banking teams .....................................20

4. The MSME sector and infrastructure for business advisory services ..................... 21

4.1. Macroeconomic context...............................................................................21 4.2. Entrepreneurial activity and the MSME sector............................................22 4.3. Business environment ..................................................................................26

4.3.1. Regulatory framework .........................................................................26 4.3.2. Financial and tax issues .......................................................................26 4.3.3. Education and training .........................................................................27 4.3.4. Innovation and R&D............................................................................27

4.4. Market for business advisory services .........................................................27 4.5. Infrastructure of business support................................................................34 4.6. Government policies and programmes for the MSME sector .....................36 4.7. International donor programmes..................................................................39

5. Recommendations for future TAM/BAS interventions............................................. 41

5.1. TurnAround Management (TAM) Programme ...........................................41 5.2. Business Advisory Services Programme (BAS) Programme ......................42

5.2.1. BAS Projects........................................................................................42 5.2.2. Market development activities.............................................................44

5.3. Addressing cross-cutting issues ...................................................................45 5.3.1. Increasing energy efficiency and reducing pollution at the enterprise level ..............................................................................................................45 5.3.2. Encouraging Women in Business ........................................................45 5.3.3. Reaching out to rural regions...............................................................45 5.3.4. Stimulating entrepreneurship ...............................................................45

5.4. Linkages with banking.................................................................................45 5.5. Informed contribution to EBRD policy dialogue.........................................46

6. Annexes.......................................................................................................................... 47

6.1. Croatia MSME Factsheet.............................................................................47 6.2. Background information on MSME stakeholder interviews in Zagreb.......48 6.3. Background information on the 2008 enterprise survey..............................49 6.4. Programmes supporting MSMEs in Croatia ................................................51 6.5. References....................................................................................................53

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1. ABBREVIATIONS

AMC Association of Management Consultants APIU Trade and Investment Promotion Agency BAS Business Advisory Services Programme BEEPS Business Environment and Enterprises Performance Survey BICRO Business Innovation Centre of Croatia BRSF Balkan Region Special Fund CARDS Community Assistance for Reconstruction, Development and Stabilization CEI Central European Initiative CEPOR SMEs and Entrepreneurship Policy Centre DFID Department for International Development (UK) GEF Global Environment Facility GEM Global Entrepreneurship Monitor GGM Grant Guideline Matrix HAMAG Croatian Agency for Small Businesses HBOR Croatian Bank for Reconstruction and Development HUP Croatian Employers’ Association ICMCI International Council of Management Consulting Institutes IFI International Financial Institutions IPA EU Instrument for Pre-accession Assistance LEF Local Enterprise Facility MELE Ministry of Economy, Labour and Entrepreneurship MSME Micro, Small and Medium sized Enterprises OCE EBRD Office of the Chief Economist TAM TurnAround Management Programme TEA Total Entrepreneurship Activity

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2. EXECUTIVE SUMMARY

Previous TAM/BAS experience in Croatia

Since inception in 2000 the TAM/BAS Programme in Croatia has mobilised over €3.2 million. Donor funding has been provided by the CEI, DFID, Germany, Austria, BRSF, and most recently Luxembourg. TAM/BAS Croatia has also benefited from EBRD funding since 2007.

TAM TAM has undertaken a total of 13 projects, 3 of which are still in progress, with new enterprises currently being screened. Of the 8 projects fully completed, all were rated satisfactory or better. TAM projects have enjoyed a wide coverage across both industry and geographic location with 77% of all projects undertaken outside of Zagreb. TAM projects are complex and with interventions carried out in many areas of business operations. In Croatia, the area of focus sought by most projects was in marketing, product design and development. What has been identified as a key factor for TAM project success has been the degree of willingness and eagerness of the staff of assisted enterprises to learn from the TAM team.

BAS BAS, on the other hand, has undertaken a total of 292 projects with 278 MSMEs, engaging 151 consultants – 130 of which are local. A total of 217 BAS projects have been internally evaluated in Croatia, with over 95% as being “successful”. It has also undertaken a number of market development activities, including two trainings promoting the development of the local consultancy market. BAS assisted enterprises widely differ in size, industry and geographic location. Over the period 2000 to 2007 the number of projects engaging smaller enterprises increased. If one compares industries served across the two comparison periods, one can observe distinct shifts in the industry classification of BAS clients. These significant shifts in the industries of BAS projects indicate a change in demand for business advice across industries. There has also been an increase in the number of projects located outside of Zagreb. BAS supported projects have had a variety of objectives and have encompassed a wide range of advisory services. There has also been a marked change in the focus of advice required by BAS clients towards more sophisticated business objectives. Comparing BAS project costs in the period 2000 to 2003 versus 2004 to 2007, we see that while the BAS contribution has remained roughly the same on average, there has been an increase in total costs of projects, translating into a greater investment on the part of the client.

Linkages with banking

4 TAM assisted enterprises in the Croatia have attracted 5 investments from the EBRD or EBRD related financial intermediaries, of which EBRD financed over €134.3 million, mobilising a total project value of over €321.4 million. Although no BAS assisted enterprises in Croatia have attracted investments from the EBRD or EBRD related financial intermediaries, 116 BAS enterprises have received over €81.9 million from external financing sources in Croatia.

The MSME sector and infrastructure for business advisory services:

This section lays out some of the main challenges and transition obstacles for the MSME sector in the country. It provides insights into the level of entrepreneurial activity, the business environment, challenges faced by the MSME sector and the supply of business support services.

a stable macroeconomic

context

The most developed of all TAM/BAS countries of operation; Croatia has experienced stable and robust economic growth in recent years and is at an advanced stage of transition to a market economy; however, the country faces challenges with respect to regional inequalities.

with growing Indicators show that entrepreneurial activity has increased, but the country suffers from

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entrepreneurial activity

both regional and gender biases in this area. A large proportion of entrepreneurs still start their business because of financial needs and not because they perceive the presence of a business opportunity. The Croatian enterprise sector has made some progress in terms of international competitiveness in recent years, however innovation activities are still relatively scarce. An EBRD run enterprise survey revealed a very high level of satisfaction of Croatian entrepreneurs with the performance of their company, yet international benchmarks do indicate that is room for Croatian enterprises to significantly improve their performance.

a growing yet underperforming

MSME sector

The importance of the MSME sector in Croatia has increased in recent years in terms of its contribution to GDP and employment, but despite its focus as a sector of key strategic importance, the 2005 Business Environment and Enterprises Performance Survey (BEEPS) highlights that the MSME sector has slightly underperformed.

moving towards a friendlier business

environment

The government has simplified the administrative system in recent years; however, entrepreneurs still have to deal with a high level of bureaucracy. The Croatian government is increasingly recognizing the importance of investing in R&D and new technologies to boost economic development and to improve the country’s international competitiveness; however, the business sector’s R&D expenditure remains relatively low, partly explaining the lack of market orientation of R&D investments1. It is also focusing on promoting the entrepreneurial spirit in youth as well as assisting enterprises in acquiring skills to improve their performance. In terms of its financial sector, Croatia has a relatively advanced banking sector and the tax system is generally evaluated as transparent and stable, however Croatian MSMEs face financing constraints.

a fairly developed market for business

advisory services yet entrepreneurs don’t

see the need for business advice

The private market for business advisory services has developed significantly over the last few years, yet Croatian MSMEs are still quite reluctant to draw on the help of consultancy services. Affordability constraints only seem to be significant for enterprises in underdeveloped areas and for micro enterprises in general. The business advisory services currently most demanded are fairly basic business services including “Reorganisation/ Restructuring”, “Computerised financial / management information systems” and “Market analysis and planning”. There is a clear need however to promote the need for long term strategic planning, the compliance with EU standards and the potential of ICT.

a present yet heterogeneous

infrastructure of business support

The Croatian government has increased its support for business support facilities in recent years. Also, the private consultancy market is developing rapidly, but still exhibits some shortcomings in terms of regional coverage, quality and pricing issues. Most stakeholders in the MSME sector suggested that the BAS programme should try to concentrate its efforts in the Areas of Special State Concern and in the wood/furniture, food-processing, health care/cosmetics, plastics and electronics sectors.

a strong but fragmented policy

environment for the MSME sector

The Croatian government has recognized the importance of the MSME sector for economic growth and job creation. It has established a relatively strong policy framework and provides a variety of support programmes – on the national, regional and local level - to foster the development of the MSME sector. Despite a clear national strategy for the promotion of the MSME sector and the existence of a network of organisations representing the sector’s needs and providing

1 Government of Croatia (2007)

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support, assistance however remains fragmented and deficiencies in the national MSME policy still exist.

international donor programmes have left

the floor to the EU

In the past, various international donors have provided Croatia with funds to support the business sector, some of which to support the development of MSMEs., The key player is currently the European Union, through the new “Instrument for Pre-Accession” IPA.

Recommendations for future TAM/BAS interventions

This section highlights the proposed TAM/BAS interventions to address the gaps and challenges analysed in the previous section.

Continuation of TAM There is still great potential for local enterprises to benefit from TAM projects in Croatia. TAM should focus on the manufacturing industry where such industry-specific advice is not widely utilised.

and BAS Stakeholders in the enterprise sector unanimously believe that Croatian entrepreneurs could benefit strongly from the help of business advisory services. The BAS grant should remain a key component of BAS assistance, however targeted market development activities should be a big component of BAS assistance in Croatia. A Grant Guideline Matrix is proposed in order to prioritize intervention in order to preserve the Programme’s additionality. Higher grants should be given to:

• smaller enterprises • projects aiming to improve management performance, introduce quality

management and certification and to improve environmental management • enterprises located in “areas of special State concern” – mostly the war-

affected areas in the East and the South of the country and some other economically depressed regions.

in addition to targeted

market development activities

It is recommended to complement BAS assistance at the enterprise level with the following market development activities in order to maximise the Programme’s transition impact in Croatia:

• Visibility and dissemination: The BAS Programme should take steps to promote the use of business advisory services and to disseminate success stories to entrepreneurs.

• MSME and consultancy training: The BAS Programme should address the existing gaps in the supply of advisory services by building capacity in: sophisticated financial advisory services, environmental management and energy efficiency, assistance with obtaining funds from EU programmes. In addition, in the areas of special state concern, BAS should consider assisting start-ups through the provision of training in basic business skills.

• Support to and development of existing relevant local institutions – particularly in relation to the market for local business advisory services: There is potential for BAS to partner with the Association of Management Consultants (AMC) and to cooperate closer with the Croatian Agency for Small Businesses (HAMAG) in order to combine efforts in this field.

with a strengthened focus on addressing cross-cutting issues

In order to address cross-cutting issues that are pertinent to Croatia’s MSME sector’s development, the TAM/BAS programme should promote measures to increase energy efficiency or to reduce environmental pollution at the enterprise level. Each TAM project should strive to incorporate such measures and it is recommended that the BAS programme offer high shares of co-financing for projects related to energy efficiency and environmental protection. It should also devote efforts to attracting more female entrepreneurs, primarily by targeted BAS market development activities, for example disseminating success stories of women in business. Reaching more remote areas, with special focus on the areas of special state concern should remain a high priority for

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TAM/BAS. Finally, there is a case for providing targeted assistance to young entrepreneurs, particularly via BAS market development activities in less developed areas.

this brief as contribution to EBRD’s policy

dialogue

This brief can be used as a source of information for EBRD’s policy dialogue, as it provides insight into the entrepreneurial activity, business environment and challenges faced by the MSME sector; names the major stakeholders of the MSME sector; and provides a clear picture of the MSME support programmes. Future challenges for the government are mainly identified as simplifying the regulatory framework, improving the educational system and intensifying the incentives for innovation and R&D activities.

an input for enhancing linkages

with banking

In line with the TAM/BAS Strategic Plan 2008-2010, TAM/BAS should continue to assist the Bank to meet its objective of generating a commercially viable project pipeline for direct investments by the Bank that will be transitional, in three ways: i) identifying potential pipeline (pre-investment); ii) providing ‘consulting and business’ services for the preparation and support of Bank private enterprise financing projects and for the enterprises themselves; iii) providing candidates for non-executive board member positions. In addition, the Programme should link SMEs in need of finance with local financial institutions supported by the EU/EBRD SME Finance Facility. This will strengthen the Bank’s impact in the enterprise sector and in the financial sector, as outlined in the EBRD Country Strategy for Croatia approved by the EBRD Board in May 2007.

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3. PREVIOUS TAM/BAS EXPERIENCE IN CROATIA

The TAM/BAS Programme promotes economic transition in the countries of EBRD operation through the TurnAround Management and Business Advisory Services Programmes, complementary programmes which develop the micro, small and medium sized enterprise sectors through a multi- tiered approach. TAM/BAS combines direct assistance to the private sector at the enterprise level with systemic market development interventions. Thereby TAM/BAS achieves enterprise level change and the development of a sustainable infrastructure of business advisory services in its countries of operation. TAM/BAS also contributes to improving the policy and regulatory environment for business through its informed input to EBRD’s policy dialogue. The overall planning, programming and implementation of the TAM/BAS Programme is managed and controlled by the TAM/BAS Programme Team, a unit of the Banking Department, based in EBRD’s London headquarters. TAM/BAS, operating within banking, is a core institutional building activity of the Bank. Since inception in 2000 the TAM/BAS Programme in Croatia has mobilised over €3.2 million. Donor funding has been provided by the CEI, DFID, Germany, Austria, BRSF, and most recently Luxembourg. TAM/BAS Croatia has also benefited from EBRD funding since 2007. This section provides an update on the progress of activities carried out by the Programme to the end of December 2007. 3.1. TurnAround Management (TAM) Programme

The TAM Programme supports economic transition by achieving enterprise change in potentially viable small and medium enterprises in the EBRD countries of operation.

TAM intervention occurs at the enterprise level. TAM transfers relevant commercial and technical know how from experienced directors and senior managers, from economically developed countries, resulting in the introduction of new management culture and improved management skills in the assisted enterprises. TAM projects frequently involve complete restructuring, encompassing all aspects of the enterprise. Projects usually have a timespan of around 18 months. TAM has no field infrastructure. TAM projects are implemented by the TAM team, consisting of experienced directors and senior managers, contracted only on the basis of individual projects. The TAM Programme began operations in Croatia in late 1999 under funding from both Finland and Ireland for a joint project. Since then, TAM has undertaken a total of 13 projects, 3 of which are still in progress, with new enterprises currently being screened. TAM projects have enjoyed a wide coverage across both industry and geographic location with 77% of all projects undertaken outside of Zagreb (see Figure 1 and 2).

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Figure 1: Project distribution by industry

Textile Mills, 1

Pharmaceutical and Medicine, 1

Miscellaneous Manufacturing, 2

Food Manufacturing, 2Food and Beverage

Stores, 2

Apparel Manufacturing, 1

Wood Product Manufacturing, 1 Accomodation, 3

Figure 2: Project distribution by geographic location

CAKOVEC, 2

KOPRIVNICA, 1

NOVOSELEC, 1

NASICE, 1OPATIJA, 1POREC, 1

TUHLEJ, 1

VINKOVCI, 1

ZAGREB, 3

BJELOVAR, 1

Although the TAM Programme has been operating in Croatia for nearly 10 years, inconsistency in donor funding has led to discontinuity in programme activity, making it difficult to draw many conclusions. Initial years of TAM intervention in Croatia saw two instances of early project closure caused by reluctance from the management of enterprises to fully take on-board the advice provided. Ownership change, common in enterprises in need of restructuring, can lead to a change in view that may not be favourable to outside advice. A change in ownership poses an

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unforeseeable risk for TAM projects that is difficult to mitigate; however, early closure has only been the case in two projects in Croatia. Of the 8 projects fully completed, all were rated satisfactory or better. All cases showed great benefits to the operations of the enterprises assisted, with improved market positions and healthy growth. TAM projects are complex and with interventions carried out in many areas of business operations. The projects undertaken in Croatia coved a range of objectives, including: improving management and organisational structure, improving production efficiency, marketing and product design/ development, implementation of information technology and/or management information systems (MIS), improvements in financial management, cost reduction and improving profitability, and developing strategic alliances. Some projects even addressed cost-cutting issues such as environmental management and certification (ISO 9000). In Croatia, we find that the area of focus sought by most projects was in marketing, product design and development – in some cases for both domestic and Western markets (see Figure 3).

Figure 3: Areas of focus within TAM projects

Marketing, 26%

IT and MIS17%

Organisational and Management

Structure17%

Reduce Costs6%Financial

Management11%

Partnerships and Contracts

6%

Business Plan6%

Production Environment

11%

What has been identified as a key factor for TAM project success has been the degree of willingness and eagerness of the staff of assisted enterprises to learn from the TAM team. This in part is made possible to the commitment of management and their openness to give the TAM team access to all parts of the organisation and actively encouraged staff to learn from the team. 3.2. Business Advisory Services (BAS) Programme

The BAS Programme supports economic transition, by both achieving enterprise change in potentially viable micro, small and medium enterprises and developing sustainable infrastructures of business advisory services in the EBRD countries of operation.

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BAS intervention is systemic in that it targets a market system by acting as a facilitator for the use of private-sector consultants by MSMEs to obtain a diverse array of services. BAS operates on both the demand side and on the supply side. On the one hand, it stimulates demand by raising the understanding of MSMEs of the potential benefits of using external consultants. On the other, it directly increases the supply and quality of local advisory services. BAS activities include assisting individual enterprises to engage with local consultants on narrowly-based, specific projects with a rapid payback. BAS supported projects typically last around four months. Additionally, BAS carries out market development activities. Examples of the latter include MSME and consultancy training, support to, and development of, existing relevant local institutions, visibility and dissemination, and informed contributions to EBRD policy dialogue. BAS Programmes are implemented through a well defined field management structure, comprising BAS Teams of local nationals in each country of operation. The BAS Programme in Croatia was established in 2000 with funding from the Central European Initiative (CEI). To the end of December 2007, BAS in Croatia has undertaken a total of 292 projects with 278 SMEs, engaging 151 consultants – 130 of which are local (see Table 1).

Table 1: BAS Projects in Croatia

BAS Projects

Enterprises Assisted

Consultants Engaged

Projects outside of Zagreb

Projects with Enterprises with <50

EmployeesApprox. Total

Turnover

Approx. Number

Total Employees

292 278 151 77% 54% 1,185,342,544 22,970 The BAS Programme in Croatia has also undertaken a number of market development activities, including two trainings promoting the development of the local consultancy market.

3.2.1. BAS Projects 3.2.1.1. BAS assisted enterprises have much variation in size, industry and geographic

location

While BAS support to enterprises is completely demand driven, the Programme aims to both promote MSMEs by enabling them to access consultancy services, local consultants though knowledge-transfer and capacity building. Always staying relevant, as the consultancy sectors for certain types of services mature, BAS moves assistance to other types of advice. BAS projects clients range in size from micro enterprises with less than 50 to small enterprises as large as 200 employees, with annual turnovers that range from as little as €128,000 to as great as €63.8 million (see Table 2).

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Table 2: BAS client statistics

LocationEnterprise

sizeNumber of

Projects

Avg. of Before Project – turnover

(EUR)

Min of Before Project –

turnover (EUR)

Max of Before Project –

turnover (EUR)Zagreb <50 39 2,919,787 320,000 18,000,000

>200 4 15,967,475 8,000,000 21,760,000 100<200 9 9,065,850 1,926,812 26,485,842 50<100 15 8,125,978 650,000 32,092,427

Zagreb Total 67 5,689,909 320,000 32,092,427 Other <50 118 1,537,533 127,526 6,100,000

>200 22 12,368,945 2,600,000 63,800,000 100<200 41 7,570,038 961,705 44,000,000 50<100 44 3,243,394 283,089 18,000,000

Other Total 225 4,029,451 127,526 63,800,000 Grand Total 292 4,410,447 127,526 63,800,000

Statistics indicate that Croatia BAS Programme is assisting smaller enterprises and rural areas in accordance to the TAM/BAS Strategic Plan 2008 - 2010. On average, 77% of projects in Croatia are located outside the main city and 54% are with enterprises with less than 50 employees. Over the period of 2000 to 2007, we find an increase in the number of projects engaging smaller enterprises. This is mainly represented by an increase in the number of projects carried out with micro enterprises (those with less than 50 employees) from 49 percent to 59 percent. This trend illustrates the focus of the programme on rural development, as well as a general trend towards assisting more micro enterprises (see Figure 4).

Figure 4: Assisted enterprises by size

2000 - 2003

>2009%

<5049%

100<20022%

50<10020%

2004 - 2007

50<10020%

100<20012%

>2009%

<5059%

BAS has undertaken projects in a wide range of industries across its period of activity, comprising both the manufacturing and services sectors, with the highest percentage of enterprises, concentrated in the metals/machinery and equipment industry (15%) and in the food and beverages industry (15%). If one compares industries served across the two comparison periods, one can observe distinct shifts in the industry classification of BAS clients. For instance, while in 2000 – 2003 ‘Metals/ Machinery/ Equipment’ and the ‘Wood Processing/ Furniture/ Forestry’ industries were the two top industries, constituting 26 and 17 percent of all projects undertaken, respectively; in the 2004-2007 period, they had dropped to only 4 and 8 percent of projects undertaken, respectively. On the other hand the ‘Food & Beverages’ saw a nearly 100% increase across the two periods. As BAS remains demand driven, these significant shifts in the industries of BAS projects indicate a change in demand for business advice across industries (see Figures 5 and 6).

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Figure 5: Industry distribution of assisted enterprises: 2000 - 2003

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%

Chemical/Pharmaceutical

Construction/Engineering

Electrical/Electronics/IT

Energy

Food & Beverages

Glass/Rubber/Plastic

Media/Communication

Metals/Machinery/Equipment

O ther

Textiles/Apparel/Footwear

Transport

Travel/Tourism

Wholesale /Retail Distribution

Wood Processing/Furniture/Forestry

Figure 5: Industry distribution of assisted enterprises: 2004 - 2007

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%

Chemical/Pharmaceutical

Construction/Engineering

Electrical/Electronics/IT

Energy

Food & Beverages

Glass/Rubber/Plastic

Health

Media/Communication

Metals/Machinery/Equipment

O ther

Textiles/Apparel/Footwear

Transport

Travel/Tourism

Wholesale /Retail Distribution

Wood Processing/Furniture/Forestry

Over the period of 2000 to 2007, there has also been an increase in the number of projects located outside of Zagreb. While, BAS has always made an effort to carryout projects across all regions in all its countries of operations, the marked increase, from 72 percent to 82 percent in projects in rural regions of Croatia illustrates the Programme’s strategic goal to play a larger role in the less developed regions of the country (see Figure 6).

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Figure 6: Assisted enterprises by geographic location over time

2004 - 2007

Zagreb18%

Other82%

2000 - 2003

Zagreb28%

Other72%

3.2.1.2. BAS supported projects have had a variety of objectives and have encompassed a

wide range of advisory services

Considering the BAS Programme in Croatia as a whole, projects have had roughly equal distribution across all categories of project objective, with most (26%) focusing on the introduction of quality management and certification. Type of advisory service required has also been distributed widely, with a high concentration in Quality Management Certification (26%) and Computerised Financial/ Management Information Systems (17%) (see Figures 7 and 8).

Figure 7: Distribution of BAS projects by objective

To Improve Environmental Management

8%To Improve

Management Effectiveness

18%

To Improve Market Performance

25%

To Introduce Quality Management &

Certification26%

To Reduce Costs23%

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Figure 8: Distribution of BAS projects by type of advice

Computerised Financial/

Management Information Systems

17%

To Introduce Quality Management &

Certification26%

Engineering Studies11%

Market Analysis & Planning

7%

Reorganisation/ Restructuring

1%

Partner Search0%

Feasibility Study11%

Environmental/ Energy Efficiency

8%

Development Planning7%

Computerised Manufacturing

Systems12%

According to the figure below, over the period 2000 to 2007 there has been a marked change in the focus of advice required by BAS clients towards more sophisticated business objectives. The changes represent the increasing sophistication of client needs, which can in part be attributed to years of BAS presence in the country which have introduced both enterprises and consultants to various types of advisory services and their benefits. The figures below show the distribution or projects by category of advice provided. The data has been grouped into two periods: 2000 to 2003 and 2004 to 20072. By comparing the distributions, trends in the market for advisory services can be determined, particularly with regards to the demand for certain services, and indirectly about the supply of services that can be provided and capacity of local consultants. Trends include: The number of projects offering advice on reducing costs decreased from 27 percent to 19 percent across the two periods. These projects represent the most basic and largely technical of consultancy projects. The trend is consistent with the idea that reducing costs is an initial priority of any enterprise before they begin to consider more sophisticated and strategic business goals. Trends also show the percentage of projects devoted to introducing quality management systems and certification decrease from 31 percent to 22 percent. This change can be explained by the BAS Programme’s effort to promote more sophisticated consultancy services since 2003 as Quality Management Systems gained popularity. Once again, this is can be interpreted as a sign of more technical and straightforward uses of advisory services becoming less in demand because the MSME sector has increasingly developing beyond the scope of such services. Projects with the objective of improving market performance have also seen a relative decline in demand from 28 percent to 22 percent, though this is not as dramatic of a change as the others. Once again, this type of service, which includes projects dealing with market analysis

2 Discontinuity of data due to funding gaps.

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and planning, development planning, feasibility studies, and partner searches, can be seen as an area of advice in which enterprises unfamiliar with consultancy services would want to utilise initially to address their business needs. Some of the components, for instance feasibility studies and market analyses are basic documentation needed by any enterprise looking to secure external financing – the most basic of consultancy services. Conversely, comparing across periods, we see the number of projects dealing with more sophisticated services and current business needs increase in relative size. There is a dramatic increase from 2 percent to 13 percent in projects focused on improving environmental management. This can be interpreted as an increase in the sophistication of enterprises and the markets they are trying to reach as the sector itself has increasingly become more developed, so has the needs and objectives of individual MSMEs. We also see an increase in projects dealing with improving management effectiveness from 12 percent to 24 percent. Similarly this can be attributed to the increasing sophistication of needs in the MSME sector through experience with consultants during the period. Improved management effectiveness, which includes projects devoted to reorganisation/ restructuring, and computerised financial/ management information systems, are services that enterprises in less developed economies or enterprises with little experience with consultants would be interested in exploiting (see Figure 9).

Figure 9: Distribution of BAS projects by objective over time

2000 - 2003

To Introduce Quality Management &

Certification31%

To Improve Market Performance

28%

To Improve Management Effectiveness

12%

To Improve Environmental Management

2%To Reduce Costs

27%

2004 - 2007

To Introduce Quality Management &

Certification22%

To Reduce Costs19%

To Improve Environmental Management

13%

To Improve Management Effectiveness

24%

To Improve Market Performance

22%

Comparing BAS project costs in the period 2000 to 2003 versus 2004 to 2007, we see that while the BAS contribution has remained roughly the same on average, there has been an increase in total costs of projects, translating into a greater investment on the part of the client. These are good signs in terms of market development because it indicates that enterprises are undertaking more sophisticated projects and are willing to pay more for such services because as recognise the value in business advice (see Figure 10).

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Figure 10: Project costs over time

Avg. of BAS cost

Avg. of BAS cost

client contribution

client contribution

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2000 - 2003 2004 - 2007

Proj

ect C

ost (

euro

s)

3.2.1.3. Evaluation of project impact on enterprises

Approximately 12 months after each BAS project has been completed, a Project Evaluation Report is prepared evaluating the benefits derived from the project and its impact on the company in terms of increased productivity, turnover, number of employees, expansion into new markets, successful completion of the projects and the attraction of investment or approved loans if relevant. The project is then rated accordingly. Projects are rated on the following scale: Highly Satisfactory; Satisfactory; Unsatisfactory; Highly Unsatisfactory. Projects are rated unsatisfactory when advice offered has not been implemented one year after the completion of the project: it does not necessarily involve dissatisfaction with the project/consultant. Since inception through the end of 2007, a total of 217 BAS projects have been evaluated in Croatia, with over 95% as being “successful” in helping to improve business performance and enhance competitiveness. This high success rate is achieved by the BAS Team’s close monitoring at the start and during the BAS project implementation. Occasionally, when enterprises’ priorities or circumstances change during the project, or indeed management is unable to commit to the project, the BAS team will cancel the project and funds are reallocated to a new project with another enterprise. In these situations, no payments have or will be made, since the BAS grant is only paid on completion of a satisfactory project. The high success rate of the projects undertaken by BAS, coupled with the importance of the development of the MSME and local consultancy sector, has been a clear indicator of the effective use of funding support.

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3.2.1.4. Consultants engaged in BAS Projects are primarily local

Figures show that an overwhelming majority (86%) of consultants engaged in BAS-assisted projects are of local origin. A small minority of projects use foreign consultants (9%), most of which are from Western European countries. And an even smaller proportion of projects engage foreign consultants that are based in Croatia (5%) (see Figure 11).

Figure 11: Ownership of BAS consultants

Local86%

Local of foreign ownership

5%

Other (foreign)9%

3.2.2. Market development activities Since starting operations in Croatia in 2000, BAS has been responsible for carrying out two successful trainings promoting the development of the local consultant market. Trainings have included: “Destination and customer relationship management in tourism”, and a series of courses in organic production (see Boxes 1 and 2).

Box 1

Seminar on destination and customer relationship management in tourism Tourism is one of Croatia’s strategic industries; therefore there is a constant need for development, investment and transfer of know-how in the sector. For this reason BAS Croatia organized a seminar on hotel management and tourism in the area of Customer Relationship and Destination Management. Together with Micro, a holding consisting of four consulting companies, specialised in adaptation and transfer of global know-how to MSMEs and Mr. Voegl, an Austrian consultant with experience in the tourism sector (particularly in the areas of Customer Relation Management and Destination Management); BAS developed the concept for a training targeted to the Tourism industry. BAS organised the logistics and identified the key participants, while Mr. Vögl developed the subject matter that focused on Customer Relationship Management over a number of core topics. The workshop was organized in two 4-day blocks, in Split, while Destination Management had a 2-day on-spot practical learning in Hvar.

18

The 20 chosen participants were from the tourism industry, of both Croatian consultants specialized in tourism development and also heads of Tourism National Boards; both potential future trainers and practitioners of CRM and Destination Management. Every participant was awarded a certificate of participation, issued and co-signed by BAS Croatia and Micro Edukacija directors. The goal of the training was to provide the attendees with a high level of transferable and practical knowledge. This combined with the essential strategic approach for the two most relevant tourism issues – CRM and destination management, the two workshops were successful in providing participants with a wealth of know how as well as the opportunity to exchange experiences with fellow attendees.

Box 2

Training on organic farming Agriculture has undergone profound changes in regards to processes, products and strategies, and also in terms of the dynamics of the labour market. In Croatia, as in many areas of Europe, farming, and especially organic farming is evolving away from being simply a part of general production sector and is becoming multifunctional as a producer of goods and services. This move, which is connected with the re-evaluation of rural areas, the development of agricultural tourism, and marketing of agricultural products, necessitates a rethinking of the types of training that are on offer and the routes by which it is achieved. Croatia has the possibilities to advance in the organic sector because of its natural resources, preserved agroecosystems, and traditional low input oriented agricultural production, yet Croatian organic production area is insignificant in comparison with EU countries due to lack of experts trained in organic production methods and techniques, late recognition of laws on organic production of agricultural products and food products, and a lack of well- developed certification system. With BAS, the Croatian consultants Biotechnicon poduzetnički centar d.o.o. developed training in the field of organic production by organising courses for consultants, producers and other interested parties on organic production methods. The seminar utilised Italian consultants that are experienced in training and qualifying courses in the organic production field. The project had the goal to train consultants and producers in organic production methods and techniques in accordance with Regulation (EEC) no. 2092/91 to prepare Croatian organic producers for export to the EU. The training was organised in three courses designed to train participants in principles of organic production, legal requirements, certification process and marketing of organic products. The three courses took place in Split in May and July 2004 with 20 participants. A final written exam was also administered. To be admitted to this exam, trainees were required to have fully attended the course. The training of organic producers and consultants was successful in: a) increasing their know-how in organic production systems; b) improving efficiency through better documentation and communication in certification systems; c) reducing non-conforming products; d) increasing market share and gaining customer recognition in Croatia and exports; e) increasing organic production in Croatia which could also be linked with tourism, developing a new branch of ecoagrotourism. Participants acquired the necessary knowledge in organic principles, EU regulation, inspection, and certification activities.

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3.3. Linkages with banking

3.3.1. TAM cooperation with EBRD Banking teams TAM keeps track of all EBRD related financing attracted by enterprises which have benefited from TAM assistance through information obtained from the Final Enterprise Reports after the completion of the project. To date, 4 TAM assisted enterprises in the Croatia have attracted 5 investments from the EBRD or EBRD related financial intermediaries, of which EBRD financed over €134.3 million, mobilising a total project value of over €321.4 million.

3.3.2. BAS cooperation with EBRD Banking teams BAS keeps track of all financing (EBRD related or non-EBRD related) attracted by enterprises which have benefited from BAS assistance through information obtained from the Enterprises one year after the completion of the project. Although no BAS assisted enterprises in Croatia have attracted investments from the EBRD or EBRD related financial intermediaries, many have attracted external financing (non-EBRD related). BAS keeps track of the external financing attracted by enterprises which have benefited from BAS assistance through information obtained from the enterprises one year after the completion of the project. 116 BAS enterprises have received over €81.9 million from external financing sources in Croatia, unrelated to EBRD. Furthermore BAS was instrumental in conducting research in two phases followed by a workshop in Zagreb on assessing the demand for an environmental credit facility in the country.

Box 3

Demand for environmental credit facility in Croatia In November 2005 a workshop was organised in Zagreb with the following objectives in mind:

• Get a clear idea of whether there is a demand for such a Credit Facility in Croatia • Obtain valuable feedback in discussing and verifying the conclusions of the study • Update the study with eventual new or missing information

Activities included presentations by the head of the EBRD Resident Office in Croatia, the EBRD head of Environmental Policy and Implementation regarding experiences of similar facilities already operating in Slovenia and Bulgaria. There was also a presentation on the experience of the BAS-supported GEF facility in Slovenia and its methodology. The workshop concluded with a panel discussion and questions to validate whether demand for a credit facility exists and what form that facility might take in the context of Croatia. Further investigation however revealed that a similar instrument was offered through the Croatian Bank for Reconstruction and Development (HBOR), sponsored by World Bank, GEF and UNDP. In addition, the EBRD Financial Institutions team concluded that the demand for such an environmental credit facility was not sufficient due to the very strict asset growth limits placed on local banks.

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4. THE MSME SECTOR AND INFRASTRUCTURE FOR BUSINESS ADVISORY SERVICES

This section provides background information on the macroeconomic situation in Croatia, the development of the MSME sector and the business environment in which it is operating. Special attention is also paid to the use and need of business advisory services by MSMEs and the development of the business advisory market. Moreover, the government’s SME policy is outlined and other international donor programmes aiming to promote the MSME sector are summarized. Thereby it lays the groundwork for the recommendations for future TAM/BAS interventions in Croatia outlined in Section 5. The information in this section is based on three sources. First, the available evidence from recent reports on the macroeconomic context, the MSME sector and the business environment is analysed. Additional quantitative information is also found in the Croatia MSME Factsheet3 in Annex 6.1. Second, this information is complemented by the results of a telephone survey of 200 Croatian enterprises run in early 2008. The questionnaire focussed on the enterprises past experiences and perception of quality and usefulness of business advisory services. The survey results were helpful in assessing: 1) the extent of the use of consultancy services by different enterprise sizes, sectors, location; 2) the types of services received, their cost and satisfaction; 3) reasons for not using consultancy services. Third, evidence on the current state of the MSME sector, its environment and the existing supply of business advisory services has been collected through 17 personal interviews with major stakeholders in the MSME sector including: government ministries and agencies related to MSME; non-governmental institutions and representatives of the business community; financial institutions; academia; international organisations and IFIs. This exercise provided an understanding of: 1) the policy environment and MSME stakeholders 2) the support programmes available to MSMEs 3) the level of entrepreneurial activity, business environment, challenges faced by the MSME sector and the infrastructure of business support. Further information on the telephone survey and the interviews can be found in Annexes 6.2 and 6.3 4.1. Macroeconomic context

The most developed of all TAM/BAS countries of operation; Croatia has experienced steady economic growth and low inflation in recent years and is at a relatively advanced stage of transition to a market economy; however, the country faces challenges related to regional inequalities. Croatia’s macroeconomic position can be described as relatively stable. The country has witnessed robust and steady economic growth in recent years with an average annual real GDP growth rate of 4.5% in the period from 1995 to 2007. With a GDP per capita of US$ 14,059 (PPP), Croatia is the most developed economy of all the TAM/BAS countries of operation. The monetary authorities have succeeded in maintaining low inflation and the government has undertaken considerable efforts of fiscal consolidation. In recent years, Croatia has attracted a considerable amount of FDI. These investments are, however, concentrated mainly in the financial services and trading sector. Manufacturing FDI made up only 26% of total FDI in the period from 1993 to 2007. Furthermore, the geographical distribution has been very uneven with 75 % of all FDI having gone to the city 3 The MSME Country Factsheets have been developed by TAM/BAS in collaboration with OCE for the TAM/BAS Strategic Plan 2008-2010 approved by the EBRD Board in October 2007.

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of Zagreb between 1993 and 2006. In 2007 nearly two thirds of FDI was directed into the domestic banking system, in the form of recapitalisations following more restrictive prudential regulations imposed by the central bank. FDI is likely to subside over the next years, as fewer large privatisation projects materialise. The progress made in terms of market reforms is reflected by the EBRD transition indicators for 2007, with ratings4 of 3 for “enterprise restructuring”, of 2.7 for “competition policy” and 4.0 for “banking sector reform”. With an average transition indicator of 3.5, Croatia is the best reformer of all TAM/BAS countries of operation. Further impetus, both for structural reforms and for economic growth in general, can surely be expected from the ongoing EU membership negotiations. Risks to the stability of the economy relate to the high level of external indebtedness (gross external debt amounted to 88 per cent of GDP in 2007 and persistently high ratios of euro substitution in private sector credit. On both counts, Croatia shows among the starkest vulnerabilities in the transition region. So far, however, Croatia has not been seriously affected by the international credit crisis. In terms of structural problems, with the economy is affected by a relatively high albeit declining unemployment rate which accounted for over 8% of the labour force in 2007. Also, the relatively reassuring data for the economy as a whole mask large regional inequalities.. In 2004, the GDP per capita of the most developed county was 3.2 times higher than the one of the least developed county and unemployment rates in the most depressed areas reach up to 30% of the local labour force. Those regions which were worst affected during the war face the consequences of significant depopulation which is reflected in shortages of skilled labour. These disparities are also reflected in the geographical distribution of enterprises, where the 10 most disadvantaged counties account for only 17.7% of all MSMEs, while accounting for 34.9% of the population. 4.2. Entrepreneurial activity and the MSME sector

Indicators show that entrepreneurial activity has been on the rise in Croatia, but the country suffers from both regional and gender biases in this area. A large proportion of entrepreneurs still start their business out of need and not due to a perceived business opportunity. Croatia takes part in the annual Global Entrepreneurship Monitor (GEM) that evaluates the entrepreneurial activity of a country with the help of the Index of Total Entrepreneurship (TEA): the ratio of new entrepreneurs (operating less than 42 months) in the entire sample of adult population. Croatia has made significant progress in this category in recent years. From 2002, when the GEM research was introduced in Croatia, to 2005 the TEA index almost doubled from 3.62 to 6.11, while in 2006 further improvement could be realized resulting in an index of 8.58. This also allowed Croatia to move from rank 32 (out of 37 countries participating in the survey) in 2002 to rank 18 (out of 42) in 2006 (see Table 3). The GEM research provides further information on the entrepreneurial climate by looking at the motivation for starting new ventures. In previous years, more than half of the surveyed entrepreneurs stated that they started their business out of necessity (TEA Necessity), i.e. forced by personal circumstances, rather than stimulated by a business opportunity (TEA Opportunity). This mostly reflects the high level of unemployment. Entrepreneurial activity stimulated by the perception of business opportunity generally results in better performance thanks to the higher level of motivation, business knowledge and desire to grow their business 4 The EBRD transition indicators range from 1 to 4+ with 1 representing little or no change from a rigid centrally planned economy and 4+ representing the standards of an industrialised market economy.

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than it is the case for entrepreneurial activity initiated as a response to the need to make a living. Only in 2006, for the first time more business formations in Croatia were stimulated by free will and not by necessity. The ratio remains, however, well below the average value for all GEM countries.

Table 3: Entrepreneurial activity in Croatia according to GEM

2002 2003 2004 2005 2006TEA 3.62 2.56 3.74 6.11 8.58Rank 32/37 29/30 29/34 19/35 18/42TEA Opportunity 2.18 1.74 2.04 2.92 4.41Rank 35/37 29/30 32/34 32/35 28/42TEA Necessity 0.85 0.59 1.57 3.09 3.81Rank 25/37 22/30 12/34 6/35 9/42

Source: Singer, S. (2007) There exists a substantial gap between the entrepreneurial activity of men and women (TEA index of 12.35 versus 4.87 in comparison to the GEM average of 11.38 and 7.51). Additional evidence on the involvement of women in business activities was obtained by the interviews conducted with major stakeholders of the MSME sector and the consultancy market and is displayed in Box 4.

Box 4

Evidence from interviews: Women in Business The latest GEM Survey investigated whether women face specific obstacles that constrain them from participating more actively than they currently do in the business sector. The experts interviewed in the GEM research agreed that women in Croatia do not have to deal with any gender-specific barriers and that women’s low level of entrepreneurial activity is mainly due to lifestyle choices. It was, however, mentioned that women are more than men discouraged from starting a business by administrative barriers. Thus, special programmes (offering e.g. pre-defined packages for start-ups including help with registration, finance, consultancy services etc.) would be needed to encourage women to participate more actively in the business sector. Apart from that, it has been highlighted that many women, especially in the war-affected areas, moved into the shadow economy during the transition period to be able to sustain their family. They would, therefore need some assistance to legalize their business. In terms of regional biases, some progress has been achieved in the efforts to reduce regional disparities due to the positive development of entrepreneurial activity in weaker regions like Slavonia and Baranja, Lika and Banovina and in Northern Croatia. The Croatian enterprise sector has made some progress in terms of international competitiveness in recent years. Innovation activities of Croatian enterprises are still relatively scarce. GEM also tries to assess the growth potential of the business sector by looking at the following four criteria: innovation in the use of new technologies, innovation in the development of new products, exposure to competition, and increased job creation. The analysis highlights that within the group of GEM countries with medium income level5, Croatia’s enterprises invest more than the average in new technologies. These efforts have, however, not yet significantly resulted in the introduction of new products. About 70% of 5 Argentina, Brazil, Chile, China, Colombia, Croatia, Dominican Republic, Hungary, Kazakhstan, Latvia, Peru, Romania, Russia, Serbia, Thailand, Turkey, Uruguay and Venezuela

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entrepreneurs sell products that are “new to no one” resulting in relatively fierce competition. Furthermore, expectations on employment capacity have remained unchanged in 2006 after a significant increase in the previous year. In the Global Competitiveness Report 2007 compiled by the World Economic Forum Croatia was ranked 57th out of 131 countries, constituting the highest ranking of all TAM/BAS countries of operation. Shortcomings can, however, be observed in the fields of “Technological Readiness” and “Innovation”. Also interviews with major stakeholders in the MSME sector yielded some evidence on the competitiveness of the MSME sector and the challenges that the EU membership will entail (see Box 5). The fact that Croatia is lagging behind in terms of innovation is also reflected in the low level of employment both in the knowledge-intensive service sector, accounting for a share of 4.4% of all Croatian workers compared to the EU-25 average of 5.6%, and in the high and medium-high technology manufacturing sector with a share of 22.1% of all Croatian workers versus 33.6% in EU-256.

Box 5

Evidence from stakeholders interviews: competitiveness and managerial skills There was a varied degree of optimism in how stakeholders in the enterprise sector perceived the competitiveness of the local MSMEs. The recurring theme was that the competitiveness of the sector has been improving in recent years, and this may be a result of the government’s focus in the sector as an area of key strategic importance for the economy. While none of the stakeholders interviewed would argue with the statement that Croatians exhibit a lack of entrepreneurial spirit, many voiced the lack of skills needed to operate a successful business. Croatians entrepreneurs have good business ideas, but don’t have the necessary managerial and organisational skills to run their business well. In general, many entrepreneurs manage their business without strategic planning or focus on long term growth – the focus seems to be on daily survival and short term goals. This is especially true for micro enterprises. While the sector is fairly and increasingly competitive on the domestic front, most of the experts feared that accession to the EU would pose a number of challenges for enterprises, which they are not prepared for. The challenges were mainly in the area of meeting product quality standards, as well as other standards, such as environmental business practices, which many enterprises are currently not operating in accordance with. Apart from that, many of the stakeholders interviewed thought that most of the micro enterprises that are operating on a survival basis would cease to exist with EU competition, while some of the small and medium enterprises that are more focused on long-term growth would have the potential to compete in the single market. The low level of international competitiveness of the Croatian MSME sector is also reflected in the low export capacity of these enterprises. It has been especially highlighted, that Croatian MSMEs are not yet aware of the challenges and opportunities that EU accession entails. Hence, they need help to adapt to the new business environment they will be operating in. The importance of the MSME sector in Croatia has increased in recent years and in terms of its contribution to GDP and employment, however, the 2005 Business Environment and Enterprises Performance Survey (BEEPS) reveals that the MSME sector has slightly underperformed. 6 Government of Croatia (2007)

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In 2006, the MSME sector accounted for 99.4% of all registered business entities and generated about 44% of the country’s GDP, and accounted for 60% of total exports and 65% of total employment in 2006 (roughly the same for the EU-15)7. The 2005 Business Environment and Enterprise Performance Survey (BEEPS) provides evidence on the performance of the MSME sector over the 2002-2005 period. Sales figures only rose by about 5% for small and by about 8% for medium sized companies, while export figures remained virtually unchanged with an increase of 3% for small and a decline of 2% for medium sized enterprises. More substantial changes could be observed with respect to employment where both small and medium enterprises experienced surges of about 17%. With respect to technological and innovation activity, about 40% of small and more than 50% of medium sized companies adopted a new technology in the surveyed period. Furthermore, more than 80% of both small and medium sized enterprises upgraded an existing product line or service, while 37% / 54% of small / medium sized companies developed successfully a major new product line or service. But only less than 14% of all surveyed MSMEs obtained a new product licensing agreement. A telephone survey of 200 enterprises run in 2008 revealed a high level of satisfaction of Croatian entrepreneurs with the performance of their business, however with some variations across different size classes and regions. As shown in Figure 12, the majority of surveyed entrepreneurs is satisfied with the performance of their enterprise. The satisfaction with enterprise performance varies to some extent between companies of different sizes with entrepreneurs of large enterprises featuring the highest level of satisfaction (95 per cent). Within the group of micro enterprises - that often experience the highest pressure on the market - only 75 per cent are satisfied with the performance of their enterprise.

Figure 12: Share of companies “Satisfied & Very Satisfied” with enterprise performance

74.6%

91.2%86.4%

95.5%

84.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Micro Small Medium Large Total

The level of satisfaction with own enterprise’s performance varies significantly across regions. Interestingly, entrepreneurs reporting the highest level of satisfaction in their business performance in Slavonia – one of the least developed areas in the country – are 93 per cent of total, while the slightly more developed region of Lika, Kordun and Banija has the 7 Government of Croatia (2007)

25

lowest share of entrepreneurs satisfied with the performance of their enterprise (see Figure 13).

Figure 13: Regional discrepancies in the level of satisfaction with performance

85.9% 85.7%

93.1%

62.5%

75.0%

84.2%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Zagreb andsurrounding

Northern Croatia Slavonia Lika, Kordun &Banija

Istra, Hrvatskoprimorje & Gorski

kotar

Dalmatia

4.3. Business environment

4.3.1. Regulatory framework With respect to the administrative system, Croatia has achieved some progress in recent years; however, entrepreneurs still have to deal with a high level of bureaucracy. In the World Bank “Doing Business Survey 2008”, Croatia is assigned to rank 97 out of 178 countries, while in the group of the 28 Eastern European & Central Asian countries it is ranked 21st, resulting in rank 12 of the 19 TAM/BAS countries of operation. Even though Croatia is named one of the top reformers in 2007, it still receives relatively low ratings in some of the dimensions of the regulatory framework specified in the Doing Business survey – most importantly with respect to dealing with licences and permits. Also, the GEM survey highlights that the large amount of administrative burdens constitute a substantial entry barrier for start-ups raising concerns about the state of the playing field within the domestic economy.

4.3.2. Financial and tax issues Croatia has a relatively advanced banking sector and the tax system is transparent and stable, however Croatian MSMEs face financing constraints. Croatia has the highest level of financial intermediation within the group of Western Balkan countries. Apart from that, a number of government funded subsidized loan schemes and guarantee funds for MSMEs have resulted in a significant number of loans being extended to MSMEs in recent years. Several recent reports8 highlight, though, that Croatian MSMEs still face some constraints with respect to long-term banking finance. Moreover, other sources of finance, like risk or venture capital funds and financing through business angels, are virtually

8 Cuckovic & Bartlett (2007), OECD & USAID (2007)

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irrelevant as a source of finance for the sector. Apart from that, the presence of the various loan schemes subsidised by the government seems to have hindered the development of commercially based micro-finance institutions and also the banking sector is not yet sufficiently responsive to the needs of micro enterprises. In addition, criticism has been raised regarding the complexity of the legal framework that the microfinance sector has to deal with.

4.3.3. Education and training The Croatian government is focusing on promoting entrepreneurship among young people as well as assisting enterprises in acquiring skills to improve their performance. Croatia has started to realize the great potential of fostering the “entrepreneurial spirit” in the country by integrating business related topics into school and university curricula. Furthermore, government training schemes for MSMEs have been extended in recent years. They often fail, however, to impart more specialized knowledge, e.g. with respect to management skills, technological requirements or marketing.

4.3.4. Innovation and R&D The Croatian government is increasingly recognizing the importance of investing in R&D and new technologies to boost economic development and to improve international competitiveness; however, the business sector’s R&D expenditure remains relatively low partly explaining the lack of market orientation of R&D investments9. A comprehensive policy framework has been developed for the promotion of technology transfer between universities as well as other research institutes and MSMEs. In this context, the Ministry of Economy, Labour and Entrepreneurship (MELE) and other ministries also offer financial support to about 14 local inter-firm clusters. Despite the government’s efforts, linkages between science, capital and new entrepreneurial ideas generally remain rather weak and the existing clusters of enterprises and research institutes are rather small and exhibit a low level of cooperation. 4.4. Market for business advisory services

Croatian MSMEs are still reluctant to draw on the help of consultancy services. While affordability constraints only seem to be significant for enterprises in underdeveloped areas and for micro enterprises in general, lacking awareness of the potential benefits of business advisory services seems to play a vital role for this reluctance. Both the 2008 enterprise survey and the interviews with major stakeholders in the MSME sector gave significant evidence on how familiar MSMEs already are with the use of business advisory services and what might be the reasons that stop them from accessing such services more frequently. From the 200 enterprises participating in the telephone survey about 35 per cent stated that they had used business advisory services so far. The figures vary, however, considerably across size classes and regions. The probability that a company draws on the help of external consultants rises substantially with enterprise size: while within the group of micro (small) enterprises only about 8 (30) per cent of enterprises have benefitted from external consultants, the corresponding shares for medium and large enterprises amount to 56 per cent and 73 per cent respectively (see Figure 14).

9 Government of Croatia (2007)

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Figure 14: Share of companies that have used consultancy services in the past

8.5%

29.8%

55.9%

72.7%

35.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Micro Small Medium Large Total

Surprisingly the greatest regional discrepancy in the share of enterprises that have used business advisory services in the past can be found between two of the more developed regions in the North of the country: Northern Croatia with 48 per cent and Istra, Hrvatsko primorje & Gorski kotar with 21 per cent. In all other regions about 35 per cent of all enterprises made use of consultancy services so far as shown in Figure 15

Figure 15: Regional discrepancies in the use of consultancy services

36.4%

47.6%

34.5%37.5%

20.8%

36.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Zagreb andsurrounding

Northern Croatia Slavonia Lika, Kordun &Banija

Istra, Hrvatskoprimorje & Gorski

kotar

Dalmatia

Those 65 per cent of companies that have never drawn on the help of consultants were further asked for the reasons why they had not used business advisory services. Figure 16 displays the percentage of entrepreneurs stating that the named motive for not using a consultant was very, moderately or slightly important for them. The main obstacle seem to be the cost of

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such services, as for almost 20 per cent of entrepreneurs the high price constitutes a reason not to use business advisory services. One can, however, not directly use this as an indication of affordability problems, as only about 11 per cent thought that not having enough financial resources has been an important barrier in accessing business advisory services. Clearly, there is a discrepancy between willingness to pay and ability to pay. Apart from that, the results on this question reflect problems of awareness of the potential benefits of consultancy services, as the second and third most important reason for not accessing such services are “I did not think my company would benefit from a consultant” and “I had never thought of using a consultant”. Problems of availability of a suitable consultant do not seem to play a dominant role as only 11 per cent of companies considered “I do not know any consultants in the region where my company is based” an important reason for not hiring an external consultant. Furthermore, concerns about the quality of the consultancy market seem to be less significant as only about 11 per cent pointed out that “I worried that the consultant would have insufficient skills and expertise to help my company” and “I worried that the consultant would not work hard” are essential motives for not using consultancy services. Figure 16: Reasons for not using business advisory services Percentage of enterprises considering

the respective reason as “very”, “moderately” or “slightly important”

14.0%

16.3%

10.9%

11.6%

10.1%

10.9%

19.4%

10.9%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

I had never thought of using a consultant

I did not think my company would benefit from a consultant

I worried the consultant would not work hard

I worried that the consultant would have insufficient skills andexpertise to help my company

I worried that the consultant might steal my ideas to use or to sellto others

I did not have enough cash to hire a consultant and I could not geta bank loan for a consulting project

I think that consultants are too expensive

I do not know any consultants in the region where my company isbased

When looking at different size classes of enterprises, it can be observed that worries about high prices of consultancy services and also about the ability to pay for them are most pronounced for micro enterprises. Apart from that, these enterprises also seem to have the lowest level of awareness regarding the advantages of drawing on the help of external consultants (see Table 4).

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Table 4: Reasons for not using consultancy services by size classes

Micro Small Medium LargeI had never thought of using a consultant 15.3% 5.3% 8.5% 4.5%I did not think my company would benefit from a consultant 18.6% 5.3% 10.2% 4.5%

I worried the consultant would not work hard 11.9% 5.3% 5.1% 4.5%I worried that the consultant would have insufficient skills and expertise to help my company 10.2% 8.8% 5.1% 4.5%I worried that the consultant might steal my ideas to use or to sell to others 8.5% 7.0% 5.1% 4.5%I did not have enough cash to hire a consultant and I could not get a bank loan for a consulting project 11.9% 5.3% 5.1% 4.5%I think that consultants are too expensive 22.0% 12.3% 6.8% 4.5%I do not know any consultants in the region where my company is based 11.9% 5.3% 5.1% 4.5% The motives for not using consultancy services do not seem to vary across regions. Concerns about the high price of such services and their affordability are, however, most distinctive in Slavonia. Moreover, in this region doubts about the quality of consultants can be observed with 17% of entrepreneurs naming “I worried that the consultant would have insufficient skills and expertise to help my company” as an important reason for not accessing business advisory services. Also in Dalmatia worries about the quality of consultants seem to prevail. In the remaining areas none of the reasons named plays a dominant role (see Table 5).

Table 5: Reasons for not using consultancy services by region

Zagreb and surrounding

Northern Croatia Slavonia

Lika, Kordun & Banija

Istra, Hrvatsko primorje & Gorski kotar Dalmatia

I had never thought of using a consultant 11.1% 0.0% 17.2% 0.0% 4.2% 5.3%I did not think my company would benefit from a consultant 12.1% 4.8% 20.7% 0.0% 4.2% 5.3%

I worried the consultant would not work hard 6.1% 0.0% 13.8% 0.0% 4.2% 15.8%

I worried that the consultant would have insufficient skills and expertise to help my company 7.1% 0.0% 17.2% 0.0% 0.0% 15.8%I worried that the consultant might steal my ideas to use or to sell to others 7.1% 0.0% 13.8% 0.0% 4.2% 5.3%I did not have enough cash to hire a consultant and I could not get a bank loan for a consulting project 8.1% 0.0% 13.8% 0.0% 4.2% 5.3%I think that consultants are too expensive 13.1% 4.8% 20.7% 12.5% 12.5% 5.3%I do not know any consultants in the region where my company is based 7.1% 0.0% 13.8% 0.0% 4.2% 10.5% Also during the interviews with stakeholders in the MSME sector and the consultancy market, the question was discussed why Croatian MSMEs do not draw more frequently on the help of external consultants. Here, concerns about the affordability of consultancy services were raised more clearly. Most of the interview partners agreed that only MSMEs in some of the more profitable sectors, like IT, and those in the major urban centres like Zagreb or Dubrovnik, would still be able to pay for business advisory services on the private market themselves if subsidized schemes like the BAS programme would cease to exists. But in general, the affordability of such services still poses a problem to the MSME sector. Especially crafts and micro enterprises that occupy themselves mainly with issues of day-to-day survival and generally MSMEs in underdeveloped areas would face constraints when the financial support would be withdrawn.

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The survey discovered, however, that the main reason for the low amount of consultancy services used by the MSME sector can not be found in the lack of financial funds, but rather in the entrepreneurs’ mentality. MSMEs are not aware of the benefits that the help of consultants could entail for their business. Business advisory services are therefore not one of their top priorities and they are not willing to pay for them even if they might have the necessary financial means. They still evaluate business advisory services rather as a cost factor than as an investment in the competitiveness of their company. In particular family-based micro and small enterprises are reluctant to draw on the help of consultancy services. This can be partly attributed to the lack of a clear managerial structure, i.e. they often do not have a clear division between ownership and management and the owner can’t take on the necessary managerial capacity. Apart from that, entrepreneurs of smaller companies often concentrate only on the short-term survival of their business without realizing the importance of planning its strategic development in the long-term. Consequently, they only access consultancy services when they are facing an urgent problem and not to improve the long-term performance of their business operations. The business advisory services currently most demanded are “Reorganisation/ Restructuring”, “Computerised financial / management information systems” and “Market analysis and planning”. The interview partners highlighted additionally the urgent need for services related to the implementation of EU standards, strategic planning and ICT. One of the questions in the 2008 enterprise survey was what kind of services the participating companies have made use of in the past. As displayed in Figure 17, the most popular business advisory services currently are “Reorganisation/Restructuring”, used by 44 per cent of all companies that have accessed consultancy services, “Computerised financial/management information systems” with 32 per cent and “Market analysis and planning” with 28 per cent.

Figure 17: Types of Services used

28.2%

9.9%

8.5%

4.2%

43.7%

32.4%

11.3%

7.0%

18.3%

2.8%

12.7%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Market analysis and planning

Development planning

Feasibility study preparation

Partner search

Reorganisation/ restructuring

Computerised financial/ management information systems

Computerised manufacturing systems

Engineering studies

Introduction of quality management and certification

Environmental management (energy efficiency or others)

Other please specify

When looking at the different size classes of enterprises, it can be observed that for medium and large enterprises services related to reorganisation and restructuring are most important, while the surveyed small enterprises access more often the support of consultants for the introduction of computerised financial or management information systems as well as of quality management systems (see Table 6).

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Table 6: Types of services used by different size classes

Small Medium LargeMarket analysis and planning 23.5% 36.4% 25.0%Development planning 5.9% 9.1% 12.5%Feasibility study preparation 11.8% 3.0% 12.5%Partner search 5.9% 6.1% 0.0%Reorganisation/ restructuring 23.5% 48.5% 56.3%Computerised financial/ management information systems 52.9% 27.3% 25.0%Computerised manufacturing systems 11.8% 3.0% 25.0%Engineering studies 11.8% 9.1% 0.0%Introduction of quality management and certification 35.3% 9.1% 25.0%Environmental management (energy efficiency or others) 0.0% 3.0% 6.3%

As far as the different regions of Croatia are concerned, no significant discrepancies in the types of services used are perceivable in the results of the telephone survey. This is, however, the case for different sectors of the industry. When differentiating only between the manufacturing and the service sector, as presented in Table 7, it can be observed that for the production industry restructuring services play a dominant role and apart from computerised financial systems also computerised manufacturing systems are frequently used. By contrast, the services sector shows high demand for services related to market analysis and marketing strategies.

Table 7: Types of services used by different sectors

Manufacturing ServicesMarket analysis and planning 15.4% 35.6%Development planning 7.7% 11.1%Feasibility study preparation 11.5% 6.7%Partner search 7.7% 2.2%Reorganisation/ restructuring 53.8% 37.8%Computerised financial/ management information systems 30.8% 33.3%Computerised manufacturing systems 30.8% 0.0%Engineering studies 7.7% 6.7%Introduction of quality management and certification 19.2% 17.8%Environmental management (energy efficiency or others) 7.7% 0.0%

Apart from that, some of the stakeholders have mentioned some additional areas of consultancy that could benefit the Croatian MSME sector substantially. With the date of the EU membership approaching, business advisory services to implement the required EU standards and the introduction of quality management systems will play a vital role in order to be able to operate in the EU Single Market. Moreover, it has been highlighted in some interviews that enterprises might need consultancy services related to partner search in order to enter new export markets and to exploit the advantages that the EU accession can entail. Apart form that, concerns have been expressed that many small enterprises elaborate business plans and feasibility studies only when they are forced to, e.g. in order to procure a bank loan. But in general, entrepreneurs of smaller enterprises tend to concentrate only on the short-term performance of their business and neglect its strategic long-term development. Hence, in terms of development planning MSMEs could profit considerably from the help of external consultants.

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Moreover, several stakeholders have pointed out that business advisory services in the area of information and communication technologies are likely to produce huge increases in the efficiency of smaller businesses, as many of them still do not have the habit to use the internet systematically for information procurement and their involvement in e-business is very low. Huge potential is also foreseen for support in the area of energy efficiency and environmental management. Most enterprises consider such intervention more as a cost factor than an opportunity and financial help through programmes like BAS might be necessary to change this attitude. Most stakeholders suggested that the BAS programme should try to concentrate its efforts on the Areas of Special State Concern10. With respect to the sectoral approach the stakeholders have identified wood/furniture, food-processing, health care/cosmetics, plastics and electronics as the key strategic sectors in which advisory services are most needed. As mentioned in Section 4.1, Croatia still exhibits large regional discrepancies. The government has identified some “Areas of Special State Concern” – mostly the war-affected areas in the East and the South of the country and some other economically depressed regions. Companies in these regions need the most help, but at the same time face the most difficulties to find the appropriate business advisory services and often do not have the necessary financial resources to pay for them. The entire country is relatively well covered by Regional Development Agencies, but these facilities vary strongly in terms of quality and generally only offer very basic services. But stakeholders also highlighted that these areas lack behind in entrepreneurial activity, such that only a very small amount of MSMEs has already established that would be suitable for BAS funding. Hence, in order to assist these areas support schemes for start-ups and micro enterprises with less than 10 employees are primarily needed. MSMEs often even struggle to receive very basic advisory services, like preparation of business plans or feasibility studies. Some experts, though, also pointed out that MSMEs in more developed areas and even in urban centres like Zagreb, could benefit from support for advisory services, especially to obtain more sophisticated services which are currently only offered at very high prices. Enterprises in the sectors named are generally already relatively well structured, but could improve their performance, especially in order to be prepared for the competition within the EU, with the help of business advisory services. Croatia clearly is very competitive in tourism, but to enhance the production capacity and especially the export potential of the country, also the manufacturing industry should receive support. As key strategic industries wood/furniture, food-processing, health care/cosmetics, plastics and electronics have been named. In the furniture industry Croatia can count on highly skilled designers, but their products exhibit deficiencies in terms of quality. Parts of the food-processing industry have already successfully entered the market for organic food. But in light of the EU accession, the sector needs some assistance to comply with the relevant quality standards. Apart from that, the ICT and biotech industry has been mentioned. In this area, many entrepreneurs have very good business ideas, but do not have the necessary skills to commercialize them in their own business. Special attention should also be paid to facilitate the knowledge transfer between research institutes and entrepreneurs.

10 Generally, these are areas that were under occupation (1991-5) or severely affected by war and usually close to the state borders with Serbia, Montenegro or Bosnia. Administratively these areas are in different counties but it can be concluded that they are in the areas of Eastern Slavonia, Lika, Kordun, Banija, Dalmatinska zagora and Dubrovnik area.

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4.5. Infrastructure of business support

The Croatian government has increased its support for business support facilities in recent years. Also the private consultancy market is developing rapidly, but still exhibits some shortcomings in terms of regional coverage, quality and pricing issues. Crucial for the promotion of entrepreneurial activity in general and the competitiveness of the MSME sector is the supply of business support facilities. When assessing the business advisory sector in Croatia, it is first of all necessary to differentiate between the private consultant market and the support facilities provided by the government or at least subsidized by public funds. Especially in more rural areas enterprises still seem to depend largely on business support services provided through government programmes11. The government increased its financial funds for business support centres considerably in recent years. Therefore, in terms of quantity Croatia can count on a relatively well developed business related infrastructure, even though significant shortcomings with respect to quality are present and will be addressed below. A report carried out by the Croatian Government from 2007 states that currently 17 regional development agencies, 27 entrepreneurial centres, 18 business incubators, 4 technology centres, 15 economic free zones and 140 entrepreneurial zones are operating in Croatia. Thus, even companies located in less dynamic regions can draw on the services of these institutions. Various reports from recent years and also a number of stakeholders have, however, pointed out that these publicly supported facilities suffer from a number of shortcomings. First of all, as all these programmes depend on funding from the government or international donors, so their long-term financial sustainability is not always secured. Moreover, entrepreneurs report that finding the appropriate programme and getting access can be time-consuming and very bureaucratic. To facilitate their search, the MELE with the help of USAID has introduced a webpage (www.business-navigator.hr), which gives information on all government programmes and other support schemes for the MSME sector. More importantly, the range of services provided is often very basic and not tailored to the needs of small enterprises. Especially technology-based start-ups face problems finding more sophisticated services, e.g. in the field of e-business and usage of ICT technology. Apart from that, the staff running such facilities is often not sufficiently trained and lacks competence leading to deficits in the quality of the services offered. The impression that Croatia has a problem of quality rather than of quantity of business related support services is also highlighted by the GEM survey. In the category “Business and professional infrastructure” Croatia is still located at one of the bottom ranks. Even more worrying, the statement “In Croatia, many people know how to start and manage a fast growing enterprise” is among the 10 worst graded statements, implying that business consultancy services and training are urgently needed. More information on the private consultancy market has been gathered during the interviews with major stakeholders in the MSME sector and indirectly through the 2008 enterprise survey (see Box 6).Throughout the interviews it has been pointed out that the private business advisory market has developed rapidly in recent years. Some large international consultancy companies have opened up branches in Croatia and already offer a wide range of services. Their advice is, however, mainly used by large enterprises. Their services are not tailored to the needs of MSMEs and smaller enterprises generally do not have sufficient financial resources to pay for highly qualified international consultants.

11 OECD & USAID (2007)

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But apart from these international players, the number of local consultants is also increasing fast as reflected in the number of consultants registered with the Croatian Association of Management Consultants. Their services are more accessible to MSMEs, however they are generally far from sophisticated i.e. help with the preparation of feasibility studies and business plans or offer accounting and tax advice. The market for these services is already relatively well developed. The experts participating in the survey highlighted that especially offers for knowledge-based MSMEs on highly specific technological skills and more sophisticated financial advisory services (e.g. for efficiency improvements) are missing. Moreover, enterprises currently struggle with the relatively complex documentation needed for EU programmes and virtually no consultancy services exist in this field. Apart from that, concerns have been expressed with respect to the quality of the business advisory services currently available. The market is still not competitive enough leading to large variations in quality across the different providers. Consequently, the pricing system lacks transparency, i.e. high fees do not guarantee high quality. Larger companies are already experienced in the use of consultancy services and know therefore what they can expect and where to find high-quality services. But smaller businesses often have little information about the market and it is difficult for them to identify competent consultants. To reduce the large discrepancies in quality, efforts are currently been made to establish a certification system for consultants. The Agency for Small Business (HAMAG), has so far certified 60 consultants mostly located in Zagreb with their own accreditation system. There is, however, still room for the extension of this scheme. A number of other institutions, like the Association of Management Consultants (ICMCI accredited) or the Employers’ Association, have created their own network of consultants and provide them with different workshops and trainings. Altogether, there is still scope for the establishment of a nationwide network of consistently certified consultants and the standardisation of their services and fees.

Box 6

Evidence from the 2008 enterprise survey on consultancy market Some of the questions posed in the telephone survey also provided some indications on the development of the Croatian consultancy market. Figure 18 displays the ownership status of the consultancy firms that the enterprises participating in the telephone survey have accessed. The high percentage of companies that have accessed local consultants (73 per cent) can be seen as an indicator for the relatively good development of the private consultancy market.

Figure 18: Ownership of consultant

Local, 73.2%

Foreign, 7.0%

Don't know, 8.5%

Local based but foreign ownership,

11.3%

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Apart from that, levels of satisfaction with the business advisory services received are with 96 per cent extremely high (see Figure 19).

Figure 19: Satisfaction with last services received

Very satisfied & Satisfied,

95.8%

Neutral, 2.8%

Unsatisfied & Very

unsatisfied, 1.4%

The costs of the consultancy services vary widely, depending on the type of service received and the size of the company. Answers on the question whether these services were subsidized by the government or another institution are highly unclear with more than half of the companies giving either no answer at all or saying “Don’t know”. Of the 33 companies providing an answer 7 stated that they have received a subsidy for their use of an external consultant. 4.6. Government policies and programmes for the MSME sector

The Croatian government has recognized the importance of the MSME sector for economic growth and job creation. It has established a relatively strong policy framework and provides a variety of support programmes – on the national, regional and local level - to foster the development of the MSME sector. The MELE is the key governmental actor in the MSME sector, yet a there exists a number of non governmental institutions that support MSME or represent the sector’s interests. For an overview of the key governmental and non-governmental MSME stakeholders see Table 1.. The main strategic long-term objectives are set out in the “Strategic development framework 2006 – 2013”. As far as entrepreneurial activity is concerned, the promotion of entrepreneurship is identified as the main instrument for regional development. Moreover, all future government policies shall be evaluated in terms of their effect on entrepreneurship. The regulatory framework for MSME support has been created with “The Small Business Encouragement Act” from 2002 stating as its major goal to increase the relative importance of MSMEs in the national economy. Currently, the promotion of the MSME sector is organized under the “SME Promotion Programme 2004 – 2008”, which outlines the government’s overall objectives for the MSME sector, development guidelines, the implementing agencies, the financial sources and methodologies for monitoring. The specific programmes and measures are then specified in annual Operational Plans. The Operational Plan for 2007 comprises financial funds of about € 15 million for various programmes in the fields of promotion of entrepreneurship, business education,

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competitiveness enhancing measures, MSME financing and creation of cooperatives and craftsmanship. Support is provided in the form of direct grants, soft loans or subsidised rent in nearby entrepreneurial centres or technology parks. The majority of the programmes is run by the MELE itself, but apart from the ministry there exists a number of non governmental institutions that run MSME support programmes or represent the sector’s interests. See Annex 6.4 for an overview of the programmes provided in relation to TAM/BAS. For 2008, the government has recently approved almost € 50 million for programmes in support of the MSME sector run by the MELE or HAMAG focusing on the provision of incentives to stimulate regional competition, competition and innovation, enterprise education and trade and crafts education. Apart from that, Croatia has adopted the “European Charter for Small Enterprises” in 2003 making their criteria the key reference against which progress in enterprise policy will be judged. Despite a clear national strategy for the promotion of the MSME sector and the existence of a network of organisations representing the sector’s needs and providing support, assistance however remains fragmented and deficits in the national MSME policy still exist. Inconsistencies between national polices and other government policies can be detected and are exhibited by the low level of coordination between the MELE and other ministries. Also, the MELE runs a large amount of fragmented programmes that often overlap or are mutually connected12. In general, no clear separation between policies and programmes is maintained. The HAMAG which was created as the actual implementation agency for government programmes has until recently operated only a few programmes, while the MELE that should concentrate on policy design, operates the majority. This might entail the danger of a programme-driven approach to policy. Apart from that, so far no systematic evaluation of government programmes has been introduced.

12 The Operating Plan for 2007, for example, names 30 different programmes directly focusing on SME promotion and 4 additional ones where SMEs can participate (for entrepreneurial zones, export and the restructuring of certain industries).

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Table 8: Overview of the key governmental and non-governmental MSME stakeholders

Governmental MSME Stakeholders Ministry of Economy, Labour and Entrepreneurship (MELE)

Croatian Agency for Small Businesses (HAMAG)

Business Innovation Centre of Croatia (BICRO)

Croatian Bank for Reconstruction and Development (HBOR)

Trade and Investment Promotion Agency (APIU)

National Competitiveness Council

SME representative agency Technological support Access to finance Trade and investment promotion Policy support The HAMAG has been founded in 2002 as the implementation agency for government MSME support programmes. Due to staff and financial shortages it has, however, until recently taken on only very few programmes from the MELE. In addition to a guarantee fund for small business loans, it runs two important programmes related to business advisory services. First, the HAMAG assumes part of the costs for consultancy services for MSMEs for a period of up to five years. Second, in order to improve the quality of consultancy services it provides training in different fields (e.g. finance and investments, marketing, technology operations, ICT) as well as an accreditation system for business consultants13.

The BICRO was founded in 1998 with the specific purpose to increase the technological competitiveness of the MSME sector. It operates several programmes comprising the provision of seed capital for knowledge-based start-ups, financial incentives for R&D investments, support for the commercialisation of research outputs, the creation of a venture capital fund for MSMEs and financial support for technology parks. With respect to business advisory services, the BICRO also runs a co-funding programme for consultancy services in technology-based MSMEs.

The HBOR, providing long-term financing at low interest rates, has developed special credit lines for MSMEs in the field of financial restructuring, start-ups, island development, agriculture, tourism, innovation and export. In 2006, interest rates ranged between 2 and 6 per cent.

APIU is a government agency with the aim to increase the investment and export activity of Croatian enterprises. The APIU offers a wide range of information to MSMEs, especially if they want to internationalize their business, engage in new markets of find new business partners.

Bringing together representatives of the four main interest groups of society (the economy, the government, trade unions and science & education) the National Competitiveness Council was created as the main organisation for policy dialogue on the major challenges of the economy. Apart from that, it evaluates the competitiveness of the Croatian economy and tries to raise the public awareness of the importance of business development. In 2003 it has published 55 policy recommendations to raise the competitiveness, which have been adopted by the government and about 85% are in the implementation phase. One of the priority areas was the promotion of entrepreneurship and the MSME sector in particular.

Non- Governmental MSME Stakeholders Croatian Chamber of Economy / Chamber of Crafts and Trades

Croatian Employers’ Association (HUP)

SMEs and Entrepreneurship Policy Centre (CEPOR)

Association of Management Consultants (UPS)

Interest Group/ Lobbying/ Provision of legal support to members

Interest Group/ Lobbying/ Provision of legal support to members

Policy think tank Interest Group/ Lobbying/ Provision of services to members

All business and craftsmen are organized in the respective chambers that represent their interests in politics and monitor and evaluate government policies that affect the business sector. Apart from that, the offer information and business advice on all important legislation and support programmes for MSMEs.

The HUP is a non-governmental organization of employers with voluntary membership. It comprises a separate section for small and medium-sized enterprises and members have access to various services (e.g. free of charge legal assistance, free protection before courts in labour disputes, mediation in disputes with state institutions and departments, mediation in international commercial contacts and a management training programme).

CEPOR was founded in 2001 as a policy think-tank which deals with the problems of the MSME sector in Croatia. It focuses on MSME related research, including the GEM survey, provides advice to government institutions and organizes activities that enhance awareness of the problems that MSMEs have to face.

Since 2005, the Association of Management Consultants is member of the International Council of Management Consulting Institutes (ICMCI). It’s main aim is to promote the quality of management and business consulting services. It provides training and certification for consultants. So far, 20 management consultants have been certified according to CMC standards.

13 This certification process is based on a public tender. The participating consultants are then selected with the help of the following criteria: high degree of education, minimum 4 years of experience in consulting and relevant experience in SME sector. The certificate is awarded after undergoing different training modules passing the final exam and is valid for two years.

4.7. International donor programmes

In the past, various international donors have provided Croatia with capital funds, many of which were aimed at the business sector. Some in particular, have focused on the economic development of, and the promotion of MSMEs in the Country. At present, the key player in this field is the European Union, through the new “Instrument for Pre-Accession” IPA. The largest donor has so far been the European Union. During the 1990s about € 369 millions were allocated to Croatia consisting mainly in humanitarian and emergency aid. Afterwards, assistance under the CARDS programme and the pre-accession funds focused mainly on social and economic development and reform of the political as well as juridical system. Several projects working directly with MSMEs or trying to promote the business related infrastructure through support of the responsible institutions have also been carried out. In 2007, aid was redirected and merged under the new “Instrument for Pre-Accession” IPA. Within the scope of the “Regional Competitiveness Operational Programme” for IPA funds covering the period from 2007 to 2009, several measures for the MSME sector are being implemented concentrating on three “priority axes”. These include: 1) Improving the development potential of lagging behind regions 2) Enhancing the competitiveness of the Croatian economy by making quality business advisory services more accessible to MSMEs and improving business and investment climate 3) Technical assistance to strengthen the institutional capacity for managing and absorbing the IPA funds. TAM/BAS assistance is in line with priority axes 1 and 2. Apart from that, Croatia can now access certain EC programmes, like, for example, the “Competitiveness and Innovation Programme” from 2007 - 2013, including the “Entrepreneurship and Innovation Programme” aiming at improved access to finance through different credit lines and guarantee funds, the creation of a network of business and innovations centres that provide support services and information on EU related issues to local companies and advising policy-makers on issues related to entrepreneurship. In recent years, Croatia has received credit funds at favourable interest rates for on-lending to the MSME sector from various sources, including the World Bank, the EIB, the EU/EBRD SME Finance Facility and the European Fund for Southeastern Europe established by various European bilateral and multilateral donors and administered by the German Bank for Reconstruction (KfW). Furthermore, some programmes provide direct grants for MSMEs or advise the government and business support institutions mainly in war-affected regions, including the World Bank’s “Social and Economic Recovery Programme”, several UNDP programmes, and the “Programme for Economic and Employment Promotion” operated by the German Society for Technical Cooperation (GTZ). As far as improved access to business advisory services is concerned, two projects of USAID have to be highlighted. The first one, “Enterprise Croatia”, was operated from 2001 to 2004 and aimed at improving the quality of business advisory services by training consultants. In its scope, the Association for Management Consultants was created. Subsequently, the programme “Enhancing Small and Medium Enterprise Performance” was introduced with the objective to reduce unemployment and improve the business performance of MSMEs in Croatia by providing technical assistance through industry associations, economic development organizations, and business and financial services firms. The project will be discontinued in 2008 and also constitutes the close-out project for USAID in Croatia.

Several other bilateral donors like Austria, Switzerland or Belgium have already phased out their operations in Croatia. With respect to business advisory services, from 2001 to 2004 the Dutch organisation PUM has carried out a project similar to TAM by sending international senior experts to companies to help them develop their business with the expert’s organisational and managerial skills. The scope of these projects were, however, much smaller than in the case of TAM, as the consultant only spend two weeks with each company. In total, 157 projects were executed under this programme. See Annex 6.4 for an overview of the existing programmes in relation to TAM/BAS.

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5. RECOMMENDATIONS FOR FUTURE TAM/BAS INTERVENTIONS

This brief lays out some of the main challenges and transition obstacles for the enterprise sector in the country and provides tailored recommendations for TAM/BAS intervention to address these challenges over the period 2009-2011. The following sections illustrate how the continuation of the two Programmes would benefit the Croatian MSME sector. In addition, strategic directions are suggested for both TAM and BAS. Further, this section also outlines how TAM/BAS can address cross-cutting issues of energy efficiency and environmental protection, gender issues, the development of rural regions and fostering of young entrepreneurship, all highly pertinent to the development of the MSME sector. As part of an international financial institution, promoting linkages between local enterprises and local financial institutions, as well as to the Bank’s own investment tools remains an integral part of the Programme. This is also the case with respect to the Programme’s informed contribution to EBRD’s policy dialogue with the country. 5.1. TurnAround Management (TAM) Programme

As outlined in Section 4, both the interviews with the major stakeholders in the MSME sector and the 2008 enterprise survey indicated that there is still great potential for local enterprises to benefit from TAM projects in Croatia. The enterprise survey pointed to high demand by medium sized companies for restructuring services. Moreover, several stakeholders highlighted three key challenges that medium sized companies currently face and where the TAM programme could produce substantial relief. First of all, many medium-sized companies have developed out of small family-based enterprises. Consequently, as their business grew, no clear managerial structure has emerged and the entrepreneur is often overburdened when executing both the function of owner and manager. Here, the TAM Programme could achieve considerable improvements by transferring best practice in organisation and management skills and help the entrepreneur to overcome his reluctance to hire a professional management. Secondly, also medium-sized enterprises that have developed out of the large, former state-owned enterprises could benefit substantially from the experience of international, industry-specific senior managers. These companies are in special need of support to upgrade their production technology and to improve their marketing techniques and many of these are currently struggling for survival. Thirdly, an additional future challenge for medium-sized companies and the MSME sector in general, will be Croatia’s EU membership. In this context, the TAM Programme could play a vital role to prepare such companies to survive in the EU Single Market enhancing their competitiveness. During the interviews, several sectors have been mentioned that could benefit particularly from the TAM Programme. In general, TAM should focus on the manufacturing industry where such industry-specific advice is more urgently needed. Within the production sector, especially industries that have a long tradition in Croatia, but are currently under great pressure have been named like the textile, metals and shipbuilding industry. Apart from that, wood/furniture, food-processing, health care & cosmetics, plastics and electronics could be targeted as these are sectors that have been identified as key industries with high growth potential in Croatia.

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5.2. Business Advisory Services Programme (BAS) Programme

During the interviews conducted with major stakeholders in the MSME sector in Zagreb, there has been a strong affirmation that Croatian entrepreneurs could benefit strongly from the help of business advisory services, hence the BAS Programme is still highly relevant in Croatia. Especially in light of the EU membership, Croatian MSMEs need to upgrade the performance of their enterprise in several areas. First of all, the background research and the interviews revealed that entrepreneurs of smaller enterprises often lack sufficient managerial skills and therefore need advice to raise the sophistication of their business operations, especially in terms of strategic planning. Moreover, in order to remain competitive within the European market Croatian companies will require support to improve their technological level and to get more involved into research and innovation activities. With respect to the EU market, help related to the implementation of the necessary standards and to ensure constant high product quality will also play a vital role. But even more than in the actual consultancy services provided through the BAS Programme, the long-term sustainability of the programme in Croatia can be found in rising the awareness of the benefits of consultancy services and in the development of a sustainable infrastructure of business advisory services. On the demand side, BAS can help the MSME sector to make first experiences with external consultants. Both the interviews and telephone survey indicated that especially entrepreneurs of smaller enterprises are still very hesitant to draw on the help of external consultants. Only for micro enterprises in some of the less developed areas this reluctance seems to depend on problems of affordability, while in general Croatian entrepreneurs are often not aware of the potential benefits of consulting. Here, the BAS programme can play a vital role to increase the involvement of the MSME sector in the business advisory market and change their attitude towards such services. On the supply side, BAS can certainly address the shortcomings in the consultancy market with respect to quality and existing gaps. BAS helps consultants to gather more experiences with the MSME sector and allow them to offer more flexible and tailored services in the future. The BAS modus operandi, allowing for the use of BAS projects and different market development activities, is apt for a tailored intervention for the MSME market in Croatia. One of the distinct competencies of the BAS methodology is that it works directly with the private sector, fostering the development of a private consultancy market that will remain post BAS intervention.

5.2.1. BAS Projects BAS will remain mostly demand-driven. The telephone survey suggests that the readiness of enterprises to use business advisory services does not vary by industry sector. Therefore, BAS intervention should not be guided by sector priorities, instead more relevant to TAM. The BAS grant should remain a key component of BAS assistance. As seen from the telephone survey, pricing seems to be a major obstacle to the use of use business advisory services. 5.2.1.1. Grant Guideline Matrix

On the basis of the results of Section 4, the following Grant Guideline Matrix (GGM) is proposed for the BAS programme in Croatia.

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The GGM is built on 3 dimensions as follows:

• Size of enterprise: Higher grants should be given to smaller enterprises. Micro and small enterprises are the group with the least experience with business advisory services. From the telephone survey results it can be observed that worries about high prices of consultancy services and also about the ability to pay for them are the most pronounced reason for this. This is despite the fact that micro enterprises are the least satisfied with their performance, potentially indicating the readiness to accept external help. Apart from this, the level of business sophistication is still very low across this group.

• Geographic location: Higher grants should be given enterprises in areas of

special State concern. As highlighted in Section 4, Croatia still exhibits large regional discrepancies. In particular, in the “Areas of Special State Concern” companies need the most help, but at the same time face the most difficulties to find the appropriate business advisory services and often do not have the necessary financial resources to pay for them. The telephone survey also highlighted that in these areas, affordability problems are more pronounced.

• Type of advisory service: Higher grants should be given to support projects

aiming to improve market performance, introduce quality management and certification and to improve environmental management. Section 4 highlights that in general, many entrepreneurs manage their business without proper attention to strategic planning or long term growth – the focus seems rather to be on survival on a daily basis. As also confirmed by BAS statistics, the business advisory services currently most demanded are “Reorganisation / Restructuring”, “Computerised financial / management information systems” and “Market analysis and planning”. However, the interview partners highlighted additionally the urgent need for services related to the implementation of EU standards, strategic planning and ICT. Huge potential is also foreseen for support in the area of energy efficiency and environmental management. Most enterprises consider such intervention more as a cost factor than an opportunity and financial help through programmes like BAS might be necessary to change this attitude.

Table 9: Grant Guideline Matrix for Croatia

< 50 40% 30% 30% 40% 50%50 ≤ 99 35% 30% 30% 35% 45%100 35% 30% 30% 35% 45%≥ 200 35% 30% 30% 35% 45%< 50 50% 50% 50% 50% 60%50 ≤ 99 50% 50% 50% 50% 50%100

19950% 50% 50% 50% 50%

≥ 200 50% 50% 50% 50% 50%

< 50 45% 40% 40% 45% 50%50 ≤ 99 40% 35% 35% 40% 45%100

19940% 35% 35% 40% 45%

≥ 200 40% 35% 35% 40% 45%

Type of Advisory Service

Other regions

Location/ Size

Capital (Zagreb)

Poor regions

and areas of special

state concern

to improve market performance (Market analysis & planning, Development planning, Feasibility studies, Partner Search )

to improve management effectiveness (Reorganisation/restructuring, Computerised financial/management Information Systems)

to reduce costs (Computerised Manufacturing Systems, Engineering Studies)

to improve environmental management (Energy efficiency, Environment)

to introduce Quality management and certificatin

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5.2.2. Market development activities 5.2.2.1.

5.2.2.2.

5.2.2.3.

Visibility and dissemination

The BAS Programme in Croatia should promote considerable efforts to promoting the use of business advisory services and to disseminating success stories to entrepreneurs. As seen in Section 4, the main objective of co-finance schemes like the BAS programme can not only be found in the provision of financial funds, but even more in enhancing the awareness of the importance of business advisory services for the MSME sector. By helping the entrepreneurs to make their first experiences with consultancy services and to choose the suitable consultant, BAS can show them what they can expect from these services and were the advantages for their businesses can be found. Once they get the habit of drawing on the help of consultants they will recognise its benefits and will continue to use them, even if they have to pay the full amount. The telephone survey makes it very clear that the level of satisfaction towards enterprise performance is generally very high amongst Croatian entrepreneurs, signalling that they do not see the need of external advice, whilst it is clear that the MSME sector is still lagging behind in terms of international competitiveness. In addition, the majority of interviewed partners highlighted the problems of awareness of the potential benefits of consultancy services.

MSME and consultancy training

The BAS Programme should address the existing gaps in the supply of advisory services by building capacity in: sophisticated financial advisory services, environmental management and energy efficiency, assistance with obtaining funds from EU programmes. Although the availability of business advisory services has increased over the last few years in Croatia, concerns have been expressed with respect to their quality. The market is still not competitive enough leading to large variations in quality across the different providers. Consequently, the pricing system lacks transparency, i.e. high fees do not guarantee high quality. In addition there are gaps in supply. Namely, sophisticated financial advisory services (e.g. for efficiency improvements) and for the provision of advice in the field of environmental management and energy efficiency are still missing, Moreover, enterprises currently struggle with the relatively complex documentation needed for EU programmes and virtually no consultancy services exist in this field. In addition, in the areas of special state concern, BAS should consider assisting start-ups through the provision of training in basic business skills. These areas lack behind in entrepreneurial activity, such that only a very small amount of MSMEs has already established that would be suitable for BAS funding.

Support to, and development of, existing relevant local institutions – particularly in relation to the market for local business advisory services

From the analysis of the market for business advisory services, there is potential for BAS to partner with the Association of Management Consultants (AMC) to further influence the market in a systemic manner by introducing higher quality standards and transparent pricing systems.

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In addition, the market would benefit strongly from the establishment of a nationwide network of consistently certified consultants. This can be done by assisting more consultants in obtaining accreditation form AMC (ICMCI accredited) and by cooperating closer with HAMAG in order to combine efforts in this field. 5.3. Addressing cross-cutting issues

5.3.1. Increasing energy efficiency and reducing pollution at the enterprise level The Croatian government is currently undertaking increased efforts to align its national energy policy with the acquis communautaire. In terms of requirements for energy efficiency and environmental protection this will also have an impact on the MSME sector. In line with the EBRD country strategy for Croatia, the TAM/BAS programme should promote measures to increase energy efficiency or to reduce environmental pollution at the enterprise level. Each TAM project should strive to incorporate such measures and it is recommended that the BAS programme offer high shares of co-financing for projects related to energy efficiency and environmental protection, in line with the Programme’s additionality in this field.

5.3.2. Encouraging Women in Business The last GEM report for Croatia revealed substantial discrepancies in the entrepreneurial activity of men and women. The general opinion that emerged in the personal interviews with stakeholders in the MSME sector was that women do not face any gender-specific obstacles when wanting to enter the business sector. Still, it has been stated that programmes to encourage the entrepreneurial activity of women are needed. The TAM/BAS programme should continue devoting efforts to attracting more female entrepreneurs, primarily by targeted BAS market development activities, for example disseminating success stories of women in business.

5.3.3. Reaching out to rural regions Croatia still exhibits significant regional disparities in terms of entrepreneurial activity. On the one hand, entrepreneurs in rural areas tend to have less sophisticated management and organization skills and on the other hand, high quality consultancy support is also more difficult to access in these areas. The TAM/BAS programme should therefore continue to concentrate its efforts on more remote areas, with special focus on the areas of special state concern.

5.3.4. Stimulating entrepreneurship Micro and small enterprises in Croatia have the most vulnerable position on the market. Therefore, the TAM/BAS programme should focus its assistance to this group of enterprises, particularly via BAS market development activities in less developed areas. 5.4. Linkages with banking

The EBRD Country Strategy for Croatia highlights that in the enterprise sector, the Bank will focus on privatisation and restructuring of state-owned companies, including in the tourism sector. In addition, the Bank will focus on supporting the further expansion and modernisation of Croatian companies in the region, by providing debt or equity finance as needed.

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In line with the TAM/BAS Strategic Plan 2008-2010, TAM/BAS can therefore continue to assist the Bank to meet its objective of generating a commercially viable project pipeline for direct investments by the Bank that will be transitional, in three ways:

i. Identifying potential pipeline (pre-investment): TAM/BAS can help the Bank to build pipelines as a result of its normal programmes of working with potentially viable companies.

ii. Providing ‘consulting and business’ services for the preparation and support of

Bank private enterprise financing projects and for the enterprises themselves: These include pre-investment consultancy assignments to assess project viability, the results of which are often shared with the companies with a view to improving their performance and project structures, as well as assignments to provide targeted business advice and support to companies simultaneous with, or post, financing. In such case, the Bank utilises TAM/BAS advisors and experts, but associated costs would not be funded by donors through TAM/BAS.

iii. Providing candidates for non-executive board member positions: TAM Senior

Advisors can be ideal candidates for these positions given their long industry experience in senior roles and their international background. All subsequent costs associated with such assignments will be paid by the companies and/or the Bank.

In the financial sector, the Bank will pursue SME finance with the support of the EU under the EU/EBRD SME Finance Facility. TAM/BAS should endeavour to link SMEs in need of finance to the supported local financial institutions. Finally, by providing insight into the entrepreneurial activity, business environment, challenges faced by the MSME sector and the infrastructure of private and public business support, this brief can be used as guidance to further developing EBRD products in order to meet market needs. 5.5. Informed contribution to EBRD policy dialogue

By thoroughly analysing the business environment and clearly identifying the challenges faced by the enterprise sector, this brief further strengthens the EBRD’s policy dialogue toolkit. Several recent reports and also some of the interview partners have highlighted that the level of bureaucracy and administrative barriers in Croatia are still relatively high. The regulatory guillotine HITROREZ is showing first results, but still huge efforts are required to simplify the regulatory framework in which the business sector is operating. Moreover, it has been pointed out during the interviews that improvements in the educational system are needed, with special focus on the integration of business related topics into school and university curricula. The government has already increased its innovation and R&D related expenditures, but apart from that incentives for the private sector to undertake innovation activities and to establish clusters, as well as linkages between research institutes and the industry, need to be strengthened. The Croatian government has already developed a relatively strong policy framework for the promotion of the MSME sector. Some improvements seem, however, advisable with respect to the co-ordination of support programmes for this sector to avoid inconsistencies and overlaps. Finally, by providing a clear picture of the support programmes available to MSMEs, EBRD endeavours to avoid the duplication of international and national efforts devoted to the development of the Croatian MSME sector and, of course to ensuring that the private sector is not crowded out.

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6. ANNEXES

6.1. Croatia MSME Factsheet

Croatia MSME Factsheet

Key MSME Sector Challenges

Source: EBRD

Source: BEEPS (2005)

Country DataSeries Name 2000 2001 2002 2003 2004 2005 2006GDP per capita, PPP (constant 2000 international $) 9,545 9,894 10,364 11,021 11,204 12,750Unemployment, total (% of total labor force) 16.1 15.8 14.8 14.3 .. 12.7Unemployment, female (% of female labor force) 17.3 17.9 16.6 15.7 .. 14.0Rural population (% of total population) 42.3 41.8 41.4 41.0 40.6 43.5Micro, small and medium enterprises (number) 59,907 76,930 87,851 91,134 96,146 94,088Enterprise Restructuring (EBRD transition indicator) 3- 3- 3- 3- 3 3 3Competition Policy (EBRD transition indicator) 2+ 2+ 2+ 2+ 2+ 2+ 2+Source: WDI (2007) and EBRD

BEEPS (2005)Change in Performance in Last 36 Months

Small Companies

Medium Companies Initiatives Undertaken in Last 36 Months

Small Companies

Medium Companies

Sales % change 5.3 7.837.3 54.0

Exports % change 2.9 -2.083.0 82.0

Fixed assets % change 14.5 7.724.2 24.0

Material inputs % change 7.3 4.53.3 12.0

Employment % change 16.9 17.97.8 14.0

% of companies adopted new technology 40.7 52.3

6.5 14.0

% of companies changed organisational structure 25.7 62.0

9.8 22.0

% change in capacity utilisation 1.6 14.09.2 34.0

Source: BEEPS (2005) Source: BEEPS (2005)

Global Competitiveness Report (2006-2007)Rank Score (out of 7)

Higher education and training 44/125 4.4 Ease of… 2006 2005 2006 2005

Extent of staff training N/A N/A 124 134 24 27 3Market efficiency 68/125 4.1 100 112 22 22 0Brain drain 61/125 3.2 170 171 28 28 0Technological readiness 47/125 3.7 130 131 26 25 -1FDI and technology transfer 106/125 4.4 109 109 23 24 1Firm-level technology absorption 80/125 4.4 117 117 24 24 0Personal computers 37/125 N/A 156 156 26 26 0Business sophistication 61/125 4.2 58 72 5 7 2Strength of auditing and accounting N/A N/A 92 140 11 20 9Burden of government compliance 69/125 2.9 28 28 9 9 0Business Competitive Index 80 76 14 13 -1Source: WEF The Global Competitiveness Report (2006-2007) Source: World Bank Doing Business Survey (2006-2007) and EBRD

Transition Country Rank (out of 28)

Developed successfully a major new product line/service Upgraded an existing product line/service

Discontinued at least one product (not production) line/service Agreed to a new joint venture with foreign partner

Obtained a new product licensing agreement

Outsourced a major production activity/service that was previously conducted in-houseBrought in-house of a major production activity/service that was previously outsourcedObtained a new quality accreditation (ISO 9000, 9002 or 14,000, AGCCP, etc)

Employing workersRegistering propertyGetting credit

Doing Business (2006-2007)

Doing business Starting a business

• Better legislation and regulation is needed, as there is currently a number of unnecessary laws, regulations and decrees, both at the country and especially the municipality level (there is a proposal to eliminate 55 per cent of all regulations, though – “regulatory guillotine”).• A training provider community is not sufficiently developed or aware of the market and is unable to respond to market requirements in terms of quality and timing, which has a negative impact on the availability of skills.

Closing a business

Global RankChange in Transition

country rank

56/121

Protecting investorsPaying taxesTrading across bordersEnforcing contracts

Dealing with licences

Business Obstacles for SMEs in Croatia, 2005

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Financing

Infrastructure

Taxes

Macroeconomicinstability

Licensing and regulation

Functioning of judiciary

Corruption

Street crime

Organised crime

Anti-competitivebehaviour

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6.2. Background information on MSME stakeholder interviews in Zagreb

In January 2008, 18 interviews with major stakeholders in the MSME sector and the consultancy market were conducted. This annex provides a list of the interview partners and the questionnaire used.

Table 10: List of interview partners

Institution Name / Position HAMAG – Croatian Agency for SMEs

Katarina Marković, Head of Managing Board Office;

BICRO – Business Innovation Centre of Croatia

Dalibor Marijanović, CEO; Ante Mamić, VENCRO and IRCRO Programme Director; Žarko Merćep, KONCRO Programme Manager;

Croatian Chamber of Economy Zoran Barišić, Assistant Managing Director, Industry and Technology Department;

HUP – Croatian Employers’ Association

Anny Brusić, Director of SME Association;

Croatian Chamber of Trades and Crafts

Natko Vlahović, International and EU Affairs Advisor; Boris Kardum, International Affairs Advisor;

Zagreb School of Management Zlatko Mateša, Assistant Dean; Zoran Barac, Managing Director; Tina Lee Odinsky-Zec, Lecturer; Ana Klikovac, Teaching Assistant;

National Competitiveness Council

Mira Lenardić, General Secretary; Martina Hatlak, Research Assistant;

APIU – Trade and Investment Promotion Agency

Božica Lapić, Deputy Managing Director; Marina Livazovic, Head of Export Support Division;

HPB – Hrvatska Poštanska Banka

Ana Klarić, Senior Executive Director (Strategy Office); Ivana Gernhardt, Assistant Executive Director (Corporate Banking Department, Small and Medium Business Division);

CEPOR – SMEs and Entrepreneurship Policy Centre

Sanja Crnković-Pozaić, Director;

HBOR – Croatian Bank of Reconstruction and Development

Jadranka Mršić Hebrang, Head of On-lending unit, Department for Small and Medium Sized Business; Ivanka Maričković Putrić, Managing Director, Export Finance Department; Iva Božović, Acting Head of International Cooperation, Managing Board Office; Alma Jagnjić, Executive Director, Credit Division;

Ministry of Economy, Labour and Entrepreneurship

Ana Vincent Šepić, Head of Division for SMEs and cooperatives; Jasminka Keser, Head of Project Preparation and Implementation Section;

IMO – Institute for International Relations

Nevenka Čučković, Senior Research Fellow;

Delegation of the European Commission to the Republic of Croatia

Ivana Podhraški, Task Manager for Regional Competitiveness;

USAID / DAI Andrzej Schafernaker, Business Development Director; Frederick Claps, Director of Office of Economic Growth; Joe L. Welsh, DAI Country Director for Croatia;

Erste Bank Marko Krajina, Head of Corporate Division

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6.3. Background information on the 2008 enterprise survey

The EBRD run a telephone survey of 200 Croatian enterprises in March 2008. The sample of surveyed firms contains equal shares of micro (less than 10 employees), small (between 10 and 49 employees) and medium sized (between 50 and 249 employees) enterprises as well as a smaller number of large enterprises (250 and more employees) (cf. Figure A3.1).

Figure 20: Size distribution of enterprises

Micro , 29.9%

Small, 28.9%

Medium , 29.9%

Large, 11.2%

As shown in Figure A3.2, all regions of Croatia were covered in the survey, with almost half of the enterprises located in Zagreb and surrounding areas.

Figure 21: Geographical distribution of enterprises

Zagreb and surrounding,

49.5%

Slavonia, 14.5%

Istra, Hrvatsko primorje & Gorski

kotar, 12.0%

Dalmatia, 9.5%

Lika, Kordun & Banija, 4.0%

Sjeverna Hrvatska, 10.5%

With respect to the sectoral distribution, about 70 per cent of all surveyed companies operate in the services sector with the remaining 30 per cent operating in manufacturing (cf. Figure A3.3). Within the service sector almost half of the enterprises are active in “Wholesale/Retail

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Distribution/ Repair Services”, while in the production sector about 25 per cent of companies are concentrated on the “Food/Beverages/Tobacco” industry.

Figure 22: Sectoral distribution of enterprises

Services, 68.5%

Manufacturing, 31.5%

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6.4. Programmes supporting MSMEs in Croatia

The market for government or international donor funded programmes or projects which provide direct or indirect (by operating in the business environment) support to MSMEs is exemplified in the diagram below. On the one hand, assistance can be provided by working directly with a wide variety of beneficiaries including: single enterprises, governmental institutions, business development service providers; financial institutions and the national workforce (this includes the inactive or unemployed, as well as students and graduates). On the other, it can be provided by an array of instruments including consulting, financial grants and training, TAM/BAS is unique however programmes providing broadly comparable services to can be broadly defined as programmes or projects which fall within the grey areas in Figure 23.

Figure 23: TAM/BAS within the market for MSME support programmes

Direct support

Indirect support

MSMEs

Governments

Business Development Service Providers

Financial Institutions

Workforce

Consulting Grant Provision* Training

Provide guarantee or grant

Provide consultancy service

TAM BAS TAM/BAS

BAS

Organize training for SMEs

*Excludes microfinance

Instrument

Direct Beneficiaries

MSM

Es

Direct support

Indirect support

MSMEs

Governments

Business Development Service Providers

Financial Institutions

Workforce

Consulting Grant Provision* Training

Provide guarantee or grant

Provide consultancy service

TAM BAS TAM/BAS

BAS

Organize training for SMEs

*Excludes microfinance

Instrument

Direct Beneficiaries

MSM

Es

Figure 24 portrays the national and international MSME support programmes that fall into the grey areas of Figure 23 in the case of Croatia.

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Figure 24: National and international programmes in support of the MSME sector

MELE- Ministry of Economy, Labour and Entrepreneurship

HAMAG- Agency for Small Businesses

APIU- Trade and Investment Promotion Agency

BICRO-Business Innovation Centre

Chamber of Economy / Chamber of Trade and Crafts

HUP- Croatian Employers Association

UPS- Association of Management Consultants

Consulting

Training (for consultants)

(for consultants)

Incubation

Financing

GovernmentBusiness Development Service ProvidersFinancial InstitutionsWorkforce

Indirect support to MSMEs

National Programmes/ Intervention

Direct support to MSMEs

EU (through IPA, CIP) USAID (USA)

UNDP implemented, funded by UN, various bilatoral donors, EU, GEF

World Bank GTZ (Germany)

Consulting

Training

Incubation

Financing

GovernmentBusiness Development Service ProvidersFinancial InstitutionsWorkforce

Indirect Intervention to SMEs

International Donor Programmes/ Intervention

Direct Intervention to SMEs

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6.5. References

Cuckovic, N. & Bartlett, W. (2007), “Entrepreneurship and Competitiveness: The Europeanisation of Small and Medium-sized Enterprise Policy in Croatia” Southeast European and Black Sea Studies, Vol. 7, No.1, pp. 37 – 56. EC & OECD (2007), “SME Policy Index 2007 – Report on the Implementation of the European Charter for Small Enterprises in the Western Balkans”. Government of Croatia (2007), “Regional Competitiveness Operational Programme 2007 – 2009, Instrument for Pre-Accession Assistance”, Zagreb, Croatia. OECD & USAID (2007), “Strengthening Entrepreneurship Innovation and Economic Development at Local Level in Croatia – An Active Review”. Singer, S. (2007), “What makes Croatia and Entrepreneurial Country? – Results of Global Entrepreneurship Monitor for Croatia, 2006”, Osijek: CEPOR. World Bank (2007), “Doing Business 2008 – Croatia”, World Bank Group, Washington D.C., USA. The World Economic Forum (2007), “The Global Competitiveness Report 2007 – 2008”, WEF, Geneva, Switzerland.

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